ETF Alternative Energy presents - How to Use ETFs in Your Portfolio
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How to Use ETFs in Your Portfolio
By William Sinclair
Exchange Traded Funds, or ETFs, have revolutionized the way individuals can now invest. Rather than a traditional mutual fund, these are mutual funds that are on a stock exchange that look, trade, and work just like stocks.
There are several advantages with ETFs over mutual funds:
- They trade instantly, there’s no waiting for the day’s closing price at 4 p.m.
- You can buy or sell them with limit orders and place stop loss orders on holdings to protect your investment from a large drop
- Many are offered that give you double or triple the underlying index value’s daily change, so you have additional leverage with your money
- Many allow you to short either a market index or a stock sector
- You can buy them in an IRA or 401k and thus can short stocks that way, benefitting from falling prices with a rising price in the short ETF. You cannot short stocks in a retirement account, because if they move against you (up), you would owe additional funds.
- You can use a sector specific ETF to hedge stock positions by providing some insurance against an opposite move in those
Traditional mutual funds don’t allow any of these, you can’t have a preset sell price, or stop loss order, you can’t buy at a specific price, you don’t get the immediate value when you buy or sell. On Black Monday in 1987, when the market plunged at the open, those who sold mutual funds had to wait until the 4 p.m. prices, which was at the day’s lows, down over 20% on average for that day alone. People, like me, who sold stock at the open had their cash immediately and avoided the day’s plunge. Traditional funds will usually cost more in fees when you get out than an ETF, which will trade at the cost of a stock trade’s commission.
You can use ETFs for various investment purposes:
- You can use them alone for investing rather than trying to pick individual stocks
- You can buy into or short an entire sector, such as financials or real estate, with one trade
- You can use them to hedge stock positions, such as using a financial short ETF to protect a long position in financial stocks, or a short index ETF to protect all your long positions at once
- You can buy the entire market with a broad index fund, such as the S&P500 or Russell 2000, or short the market the same way
- You can lessen your risk because there’s no chance of bankruptcy or a bad earnings forecast such as may occur with individual stocks
- ETFs allow beginners to safely learn how to trade while remaining diversified without having to analyze individual stocks
ETFs have succeeded because of all these advantages. Most now trade millions of shares per day, and I would avoid those that still trade below 100,000 shares daily, which is called liquidity; you only want to trade liquid stocks. For beginning investors, these offer the safest way to learn how to trade the stock market with the least risk. Simply buy a long or short S&P500 or Dow 30 fund, put in a stop loss order to protect yourself from a big loss, and you have easily started down the road to safer investing.
William Jose Sinclair
Find any ETF you may need at http://etfguide.blogspot.com
Find more stock trading wisdom from 30 year traders at Pro Stock Traders http://prostocktraders.blogspot.com
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