ETF trading. Features that you need to know how to make money on ETF trading

Ted Capwell

ETF Trading

ETF (Exchange Traded Fund) is a specific type of asset traded on the exchange. It is a mutual fund derivative, however, it has one key difference. Exchange traded funds, unlike mutual funds, can be freely traded as assets on the exchange. It is a relatively new type of security that has become widely popular among both investors and traders alike. In this article, we will go through what exchange-traded funds are, where they came from, what is unique about them and how the average user can earn profit from them. An exchange-traded fund, or ETF, is an investment portfolio containing various valuable assets. They can include indexes, company assets, securities, and currencies.

This investment tool, in contrast with mutual funds, has a high level of liquidity, meaning that it can be freely traded on the exchange throughout the day. Although, its price is calculated on the basis of the real asset prices collected in the portfolio. The main reasons investors are drawn in its direction hinges on the opportunities it has to offer and the simplicity of use. The deep level of risk diversification built in is such an important aspect. If you buy an ETF asset, in essence, you are investing funds in the economy as a whole of a specific country. There are even funds that include an array of indexes from various countries.

Trade ETF

The History of the Appearance of ETF

Exchange traded funds began their life in the early 90’s. In the US, the first fund created and actively traded on the exchange was launched. At its core is the S&P 500, one of the founding indexes, with a sum total asset price exceeding $300 million dollars. Roughly 10 years later, several hundred exchange funds had been created. Their average price at the time surpassed half a million dollars, but now it is worth over 3 trillion.

A similar situation unfolded in Russia, as did in the States, however later. Only as recent as 2010 have ETFs begun to be traded actively in Russia, as that is when regulations appeared for this type of financial operation. Therefore the total level of investment is clearly lower than in the US and accounts for no more than half a billion dollars. However, this type of asset attracts more and more attention from investors, including everyday people. This can be explained by the low threshold for entrance. You can start earning with balances as low as $50-$100 dollars.

Put simply, what is ETF

Exchange traded funds are an updated version of mutual funds. This description explains little to the reader, as the majority of which likely have a poor understanding of how mutual funds work. Therefore, we will quickly move on to a more in-depth explanation. So, an exchange-traded fund, ETF, is made up through a combination of several different assets, such as possibly industrial exchange indexes, assets of popular companies, and/or currencies. Also, funds can be invested in any desired direction, which the organizers consider to be lucrative.

The ETF funds are spread out between a large number of assets, inherently diversifying the risk. If a problem arises with a particular company, or even the price of an industry in general, it isn’t a deciding factor in determining the final result in terms of the profitability of the investment portfolio. This provides average investors more security on their investments.

Every fund issues its own asset. Their price is determined based on the total size of the fund divided by the number of shares produced. Therefore, all exchange-traded funds traded on the exchange are in effect assets that have added security. The price of specific assets doesn’t directly correlate with the price of derivatives with varying investments in them.

For illustrative purposes and to gain an overall better understanding, an analogy can be made with typical, publicly-traded companies. So, say an organization releases 100 assets of equal price, each shareholder will receive 1% of the total capital. Through the course of the year, the company doubled in size. Each shareholder still owns 1% of the total fund, however, in real terms, their money has doubled.

It is a similar case with ETF. The moment the fund’s balance begins to increase, every contingent stock traded on the exchange also starts to see a price increase. If there is a loss, accordingly, the negative dynamic will be reflected on the exchange as well. When acquiring ETF, investors become for all intensive purposes shareholders, who own a percentage of the investment portfolio put together by the fund creators. However, this doesn’t enable them to influence the portfolio composition (direction of investment), the opportunity begins and ends with the right to buy and sell the asset freely on the exchange at any time.

The advantages of ETF for the average investor

Let’s begin with the main goal of any investor, namely to earn a profit. This article is aimed at normal people, who don’t have a formal education in economics and aren’t familiar with the ins and outs of trading and investing in securities. It is such a complex and wide topic that, in order to truly understand it, you’d need to devote the majority of your life to studying it.

However, in terms of work, investors and analysts are nearly always different people, each is best off sticking to their own tasks. In this context, exchange-traded funds meet the demand for a simple, transparent and effective tool for profit. ETFs are ready-made investment portfolios, compiled by professionals themselves. All investors need to do is put their funds into a reasonable project, whose price is projected to increase. Without getting into the details, we can note that simplicity is the key factor with exchange-traded funds. That being said, let’s take a look at the advantages of this type of investment in further detail.

Diversification. Exchange traded funds are unique in that their portfolios are comprised of a wide variety of assets. To the extent that they can be comprised of indexes, reflecting in their own right the dynamic capitalization of up to 500 companies. There can be several of these indexes as well. This approach protects your investment from any negative scenarios in terms of growth. If the entire industry is in jeopardy, investors always have time to sell the fund asset on the market, regaining the vast majority of their investment. That being said, these situations rarely arise. Even the complete collapse of one of the companies doesn’t lead to a significant loss in the portfolio, depending on the share percentage. Usually, ETFs are considered unsuccessful when their growth rates are slower than originally projected.

Accessibility. Exchange traded funds offer a unique opportunity to invest in a safe, stable market with a minimal deposit. If you were to take the traditional approach and purchase the company shares outright, then you would need to invest hundreds of thousands of dollars to purchase such a large number of securities. Smaller sums wouldn’t afford you the opportunity to purchase enough assets in the necessary proportion, recommended by diversification guidelines. At the same time, ETF enables you to participate in a portfolio with minimal investment, as ETF is in essence already the asset of a mutual fund.

Stability. The composition of the portfolio changes periodically in reflection of changes in the market. However, as an investor, you shouldn’t be worried about this as there are no fundamental changes to the overall structure. We are speaking more in terms of small corrections that allow analysts to move funds around to what they see as more lucrative directions. Therefore, they serve to stabilize the fund in fast-changing market situations.

Liquidity. ETF is widely popular amongst traders, therefore it isn’t difficult to realize assets regardless of the situation on the market. The process of buying/selling takes minimal time, so much so that it can be counted in seconds. Meaning that investors can register their trading result in minimal periods.

A key feature of ETF is the market differentiation between primary and secondary. In the first case, only authorized participants are able to access these trading platforms. On this level, assets are released as well as liquidated. Mutual funds are, rightly so, comprised of 50 thousand assets or more as standard in any one operation. Secondary market access is widely accessible, without any signatures necessary. All trading operations follow a similar pattern that exists on the asset and securities market. The average internet user doesn’t have access to the primary level, however, they can access the secondary market, thus allowing them to trade any collection of assets with minimal investment.

The nuances of managing ETF on the Russian market

Exchange traded funds don’t differ wildly on the Russian market. On the legislative level, clear regulation was only passed for this new kind of financial operation in 2012. Then on par with mutual funds, a new type of investment fund was added, which has several differences from the latter, however, not so fundamental as to force a separation into a separate category. Only one company in the Russian Federation offers this type of exchange contract, FinEx. Its actions are regulated by the Russian laws governing the securities market. The company received its license from the Central Bank of Russia and holds the status of an official market participant.

The National Bank of Ireland fulfills the task of regulating the trading process. Foreign corporations could gain access to the Russian market due to the intermediaries and a large number of market makers. Currently, the Moscow Exchange offer anyone who desires the opportunity to invest in ETFs issued by various countries, including European, Asian, as well as American.
How do you profit from ETF?

In Russia, ETF trading is conducted through the Moscow Exchange. Anyone who wishes has access, as the market is opened to all individuals. First and foremost, you need to open a special trading account with a bank or a broker. Following this, you need to make a deposit with a broker. You also need to sign the agreement. The specific procedure for opening a trading account varies depending on the platform or broker. For example, you can register on the Moscow Exchange online.

After that, you will gain access to the QUIK trading platform, created with the aim of making it easier to access the exchange. Through this application, you can easily apply to purchase the fund share you’re interested in, in your desired quantity. The system was built for professionals, however, even for beginners, it isn’t difficult to grasp how it works.

In terms of the technical aspects of trading, you couldn’t call it hard, it only appears so at first glance. The most difficult part for investors is conducting the necessary market analysis and selecting the most lucrative assets. Currently, on the Moscow Exchange, there is a list of authorized exchange-traded funds. The list is extensive, including more than 1,500 items. There are details available on every tool, from its type, direction of investment, profitability, current exchange price, as well as further information.


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