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Are ETFs low risk and suitable for beginner investors

Are ETFs low risk and suitable for beginner investors

In an industry that was largely dominated by large banks and institutions, the online trading industry has slowly changed to accommodate the retail traders. Retail traders can easily trade Forex, Stocks, and ETF, etc., and make consistent profit from the financial market. However, every investor needs to understand the importance of risk diversification process in trading. You can’t become a profitable trader unless you know the proper way to place your trade and how best to manage your risk.

ETF stands for Exchange Traded Funds, and it allows the traders to maintain a diversified portfolio with a very low-risk exposure. ETFs became popular between the years 1980 -1990s. People used to invest money on S&P 500 and Dow Jones Industrial Average. However, people now do have access to a wide range of ETF which even includes trading CFDs, stocks, bonds, currency pairs, gold, oil, real estate investments and more. So, does this mean a wide range of asset is the key reason behind the rising popularity of ETFs? Well, there are a few things you need to consider before you start to understand why ETFs are low risk and suitable for the new investors.

Intraday liquidity

Intraday liquidity is one of the major reason for which ETFs are considered as a low-risk investment business. Unlike mutual funds, you don’t have to wait until the end of the business day to get the exact price. Those who trade ETFs can easily place a trade and close their trade based on real-time price feed. So closing your profitable trades and cutting the losing orders become extremely easy. This eventually reduces the risk exposure to a great extent in the long run.

A Low-cost trading environment

In ETFs industry, you don’t have to pay heavy fees like physical stock trading. Though some brokers charge commissions, it’s nothing compared to what we have in stock trading. Some of you might feel like the associated cost involved in the trading of stocks as insignificant, but if you aggregate the total commissions in a month, you will easily understand why many traders prefer ETFs and try to focus on the low-cost premium trading environment.

ETFs allow traders to ride easily with the trend

Every professional trader has come across this phrase “Trend is your friend.”  If you want to protect your investment and make a consistent profit from this market, you need to learn the perfect way to place a trade in favour of the market trend. Since ETFs involves products on high demand, chances are very high you will be able to ride a strong trend. Unless you trade a volatile market, it’s really hard to make profit consistently. And those who trade ETFs usually get a decent level of market volatility to execute quality trades. Though ETFs trading is extremely profitable yet you should never trade with the money that you can’t afford to lose. Always remember, the investment business is totally unpredictable, and you must be prepared for the worst case scenario.

ETFs can improve any portfolio

The most significant strong point of ETFs is their low annual fees. It is normal to have ETF fees as low as 0.1% of the assets as opposed to mutual funds and other investment options available for beginner investors. This is because all assets are tied to a single portfolio, thus reducing the amount of money and resources spent on market analysis. ETF’s are associated with low taxes and investors receive dividends from time to time.

ETFs provide extra trading opportunities. They are sold like normal stocks, which creates many trading options. Investors who are well acquainted with margin trading can grow their account balance exponentially through various investment strategies. ETFs are also more transparent as you can check the status of your money in real time, unlike mutual funds, which provide a report of their holdings bi-annually. Switching to ETF’s is relatively easy especially when using tax-free accounts; you simply cease investing in stocks or mutual funds and start buying ETF’s.

 

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