Intro
Exchange-traded funds (ETFs) are ideal for anyone starting in the stock market. They provide many advantages such as low operating fees, rapid trading volumes, diverse investment options, diversification, and so on. These qualities also make ETFs excellent platforms for new traders and investors to employ various trading and investing methods. Here are seven of these methods that you might want to try out:
Dollar-cost Averaging
Dollar-cost averaging is the practice of purchasing a predetermined quantity of an asset at regular intervals, regardless of changing price. Young investors who have been in the workforce for less than a year and have a consistent salary can use this investment strategy. These individuals should invest $400 monthly into an ETF or a collection of ETFs rather than putting it into a low-interest savings account.
There are two primary advantages of this method. The first is that it helps to instill discipline in the savings process. The second benefit is that by investing the same fixed-dollar amount in an ETF every month, you will have more units of the ETF purchased at low prices and fewer units at higher prices. This brings down the overall cost of your holdings over time.
Asset Allocation
Asset allocation means allocating a portion of a portfolio to different asset categories—such as stocks, bonds, commodities, and cash. This is a powerful investing tool that introduces new investors to the idea of diversifying their portfolios. The low investment threshold for most ETFs makes it easy for beginners to implement a basic asset allocation strategy, depending on their investment time horizon and risk tolerance.
Swing Trading
Swing trading is an investment strategy that attempts to profit from short-term stock price movements. While this type of investing can be very profitable, beginners must be wary of the inherent risks involved. Traders who want to make swing trades should only use a small percentage of their portfolio. Before swig trading, you need to consider several vital factors, including the current volatility and expected market direction (i.e., up or down).
After researching ETFs with high volume movement in either order, invest in shares just before they have reached significant highs or lows within a given time frame—a day being ideal—and then sell once prices rebound towards recent average levels. Swing trading is considered a short-term strategy that should not last for several days or weeks at the most. Otherwise, you risk losing money and damaging your portfolio’s performance over time.
Sector Rotation
Sector rotation entails moving funds from one sector of the economy (i.e., technology) into another (i.e., healthcare). For example, if oil stocks are experiencing high volatility in price, avoid this area and choose other markets such as utilities. These sectors tend to move opposite each other based on market conditions and economic trends.
Sector rotation can also help investors avoid significant losses when some sectors of the economy begin to struggle while others thrive due to changing market dynamics. Experienced traders often employ this trading style with a keen sense of anticipating which economic sectors will be the next to boom or bust.
Sector rotation should only be used as an investment strategy if you are comfortable taking on high risk and volatility. It can result in significant gains—or losses, just like any other type of investing—over short periods depending on market conditions.
Short Selling
Short selling is another way investors commonly take advantage of ETFs for hedging their stock portfolios against potential declines. By borrowing shares from existing shareholders through various financial institutions, they sell these borrowed securities at current market prices before repurchasing them later when the share price has declined significantly to make a profit.
Short selling can be a risky maneuver to make. To avoid losses, one must keep in mind that share prices rise over time. This should always be considered before initiating the short sell process. If you are unsure whether your brokerage firm allows for short selling, check with them directly before taking action. Remember, there could be massive consequences if you do it incorrectly and lose money instead of making an investment profit.
Betting on Seasonal Trends
Betting on seasonal trends is another method traders employ when looking for opportunities within the ETF markets. Investors take advantage of the fact that specific sectors tend to move upward during particular times of the year while decreasing in value at others.
For example, heating oil prices increase once winter weather hits. The demand for oil rises while supply dwindles. Thus, traders can buy shares in an ETF related to this industry while prices are relatively low before selling them off at a higher rate when they peak again during December through February every year. While seasonal trends are often difficult to predict with precision, one thing you can count on is that most seasons eventually return within their given period—just like clockwork.
Hedging
Hedging entails using other types of investments as insurance against potential losses by purchasing shares in another asset that moves exactly the opposite. For example, if you hold ten stocks at $20 each and expect them to decline over time, buying put options on five additional securities priced at $15 would protect against downside risk.
Key Takeaway
The bottom line is that ETFs are versatile financial tools with many benefits, but they can also act as powerful hedges for your existing stock portfolio if used correctly. There are many investing approaches, whether you trade them on their own or use strategies like dollar-cost averaging to invest in multiple securities at once. Select one that works well for your overall investment strategy and goals.
