It is a well-known fact that the diversification of your assets is a great risk management strategy and a way to expand your portfolio. Say, you have some money and you want to create a portfolio, investing or trading 25 different stocks, but they can be quite pricey, especially those of large corporations. How to snatch a whole portfolio of assets, all saturated in one? ETF trading might be the answer, although it may seem a bit complicated at first.
In reality, trading on ETFs on IQ Option is not much different from trading stocks. You just need to understand how ETFs work and learn the basics. Let’s dive right in and find out.
What is an ETF and why should you consider it?
The ETF abbreviation stands for Exchange Traded Fund. ETFs are set up to track certain sectors or commodities, but they can be purchased and sold just like regular stocks. The convenience of ETFs is that you can essentially have your share of a big stock collection, with a considerably smaller investment amount.
Types of ETFs
There are different types of ETFs out there: stock ETFs, industry ETFs, commodity ETFs, currency ETFs and more. For example, stock ETFs comprise a collection of stocks from a certain sector. Their purpose is to give traders diversified access to an industry and allow them to benefit from the sector as a whole.
One of the ETFs of this type is the S&P 500 ETF (SPY). This asset tracks the S&P 500 index, which includes stocks of 500 large US companies — giants like Amazon, Alphabet, Facebook, McDonald’s, Walmart and more.
Another example may be Gold Miners ETF (GDX), which offers an exposure to the overall performance of gold-mining companies, which are mainly allocated in North America.
By trading ETFs, you essentially purchase a whole basket of stocks, instead of investing or trading each of them individually. For instance, the Amazon stock alone is worth over $3,000 at the moment, so ETFs can be a huge relief for traders on a budget. Let’s have a look at the pros and cons of this type of trading.
Advantages of ETF trading
- Smaller investment: there is no need to trade or invest in each stock separately. Now you can get your hands on a whole basket of assets all at once.
- Accessibility to beginners, as they are simple to trade
- Possibility to choose a whole sector to invest in or trade, benefitting both from big players of the sector and entrants with potential growth
- High diversification of assets, which minimizes risks
- Flexibility to choose from over 20 ETFs on the IQ Option platform
Disadvantages of ETF trading
- Might be less profitable than certain high-performance stocks
- ETFs that focus on a certain industry might provide less diversification
- There may be less opportunities of extreme volatility for certain ETFs
How does ETF trading work on the IQ Option platform?
On IQ Option, every trader has an opportunity to trade CFD on ETFs. If you are not sure what CFD means, check our extensive article on trading CFDs on stocks after you finish this material.
In order to trade ETFs, you need to follow several basic steps:
- Register an account on IQ Option and proceed to the traderoom
- Click on the plus (“+”) icon and choose an ETF from the asset list
- Choose the investment amount, set the multiplier and pick the Stop-Loss/ Take-Profit levels. These steps do not differ from trading stocks, so opening a trade is quite easy and fast
- Choose the direction in which you estimate the price of the ETF will move — up or down, and click “Buy” or “Sell” accordingly.
- To close the deal, you may wait until the Take-Profit/Stop-Loss levels are reached, or close the trade manually at any moment.
If you wish to improve your analysis skills and be able to trade like a pro, learn how to use the Bollinger Bands strategy. You can apply it to any ETF, since it works for different assets and timeframes.
If you are considering trading with ETFs, you may wonder whether there are any fees or hidden costs that might affect your outcomes. In fact, if you are trading CFDs on ETFs with IQ Option, there aren’t many fees that you will have to pay, but you still need to be aware of them. There are two of them:
- Overnight fee. This is a commission charged for transferring the trading position to the next day, if you are holding it longer than one day. Note that the overnight commission can be both negative and positive — if it’s positive, the fee will not be deducted from you, but credited to your balance.
- Spread. The conditions of the spread as well as the overnight fee can be checked in the traderoom, simply click the “Info” button under the asset name and then switch to the “trading conditions” tab.
The bottom line
ETFs might be a choice for you if you want to get more value for your money and diversify your portfolio. That does not mean that you are ensured with high returns: ETF trading is just as risky as any other instrument and does not have 100% guarantees. However, if you are looking to enrich your trading experience and try something new, you might want to give ETFs a try. Don’t forget to apply both fundamental and technical analysis and follow the news of the industry, which the ETF focuses on and practice your trades before using the real balance.