Exchange-traded funds (ETFs) are index funds traded on stock exchanges. Though not mutual funds, they offer all the benefits of diversification you would enjoy trading a mutual fund.
ETFs also enjoy all the liquidity benefits of trading individual shares.
You can profit with an ETF
Generally, when the value of the assets within a basket increases, so does the overall value of the basket; conversely, when they decrease, so does the overall value of the basket. In other words, when the assets within an ETF increase in value the value of the ETF increases, and when they decrease in value the value of the ETF decreases.
Trading ETFs offers many benefits to you as an individual trader:
ETFs enable you to own multiple assets simultaneously without having to buy each one individually. Diversification can also help protect you from unsystemic risk.
ETFs are freely traded on stock exchanges just like regular shares. As long as the stock exchanges on which the ETFs trade are open you can buy or sell any ETF, an advantage over mutual funds.
Because ETFs are freely traded you can set stop-loss orders that close your trade automatically when your pre-determined price is reached. Stop-loss orders allow you to implement appropriate risk management measures to your account.
ETFs typically have lower fees because they are passively managed. Most track a specific index or a market sector; since the composition of most stock indexes and share sectors barely changes, managers of most ETFs do not need to change the holdings within the fund very often.
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