7 Ways To Ensure Success In Buying And Selling ETFs

Includes: DIA, QQQ, SPY
by: Sandeep Godiyal

Placing ETF (exchange-traded fund) trading orders without carefully planning things and considering risks may lead to a lost investment. Learning proper trading methods is important for you to avoid unnecessary spending and to earn as much as possible.

Here are seven ways to ensure successful ETF buying and selling that will increase your chances of earning. If you are a novice in the field and are not yet familiar with stock exchange processes, you can seek the help of a professional to guide you throughout.

1. Do Not Trade ETFs as the Stock Market Opens or Closes

The price discrepancy between your ETF's net asset value [NAV] and intraday price is at its largest as the trading day begins and ends. During the market opening, the spread (or difference in price) remains at a high level and will only stabilize when all stocks begin their trading. In the closing, before 4:00 PM, regular balancing of books takes place, which in effect, can cause volatility on funds on a market-wide scope.

To avoid having to deal with spreads, place your orders only half an hour before and after the stock market closes and opens.

2. Avoid Buying or Selling ETF on Days with Price Swings

Price swings happen as trading goes volatile due to spreads. Placing trading orders during such time can affect your ETF in two ways. First, it can increase the difference between the actual prices of securities from your net asset value and your fund's share price. Second, it makes fund trading harder to meet at one point from the seller's and buyer's perspective. As the bid/ask spread increases, selling price and buying price moves farther from each other, thereby making trading cost more expensive than it normally is.

3. Be Conscious of Trading Hours When Ordering from the International Stock Market

Placing ETF trading orders with the international stock market will result to a wider spread if the orders enter at those markets' non-operational time. For instance, key international stock markets in Japan, Australia and China do not fall on the same operational span as in the U.S. at all, while the London Stock Exchange only opens at 11:20 AM [EST]. The European Stock Market closes as early as 10:30 AM [EST] in the U.S.

To eliminate price discrepancies between commodity contracts and commodity ETF as much as possible, transactions are best done during the standard trading time. For example, the Chicago Board of Trade operates from 10:30 AM to 2:15 PM [EST] while Comex Metals Exchange's metal contracts only open from 8:20 AM to 1:30 PM [EST].

4. Stay Away from Unnecessarily Trading Your Investment

The amount of actual trading done and the commission cost received by a broker can negatively affect your ETF's market price. For this reason, limiting the frequency of trading and hiring a broker with a justifiable commission fee are highly recommended practices.

Another method of minimizing commission duties is by investing in an index mutual fund rather than in index ETF. Because fund purchases are minimized in index mutual fund, paying necessary commissions for buying and selling funds will be avoided as well.

5. Monitor Tax Distributions Dates

Monitoring tax distributions by companies or ETF providers can help in avoiding losses from paying tax liabilities or owning a fund that has pending liabilities. Since announcements by companies are made at different times of the year, it is wise to keep track and know when to sell a taxable account or buy only after the liability has been settled by the seller.

6. Prefer ETFs with High Trading Volume

While high trading volume does not necessarily translate to liquidity, it can still impact your limit orders by tightening the gap between your selling price and the highest buyer's bid price. It will likely result to a cost savings difference.

7. Always Consider Limit Orders When Purchasing Exchange-Traded Funds

For a buyer, limit orders will determine the exact share price of an ETF that you are willing to spend for. For a seller, on the other hand, limit orders can potentially increase an ETF's price, making bids fewer and orders harder to fill in.

Another way of protecting your investment is by using a stop-loss order, which can pre-determine the extent you should sell and to whom you should sell should there be a decline in market value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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