For any new trader, the trading market can be intimidating. If you are determined to make money in the Singapore stock market but are clueless about how the market works, it is good to first learn about ETFs.
Whether you have occasionally bought and sold stocks or have experience in mutual fund investing, learning about ETFs can go a long way toward protecting you against common pitfalls new traders find themselves in. Here is everything you need to know about ETF trading.
What is an ETF?
An ETF, also referred to as an exchange-traded fund, is a broker’s basket of securities that you buy or sell. This can include bonds, stocks, commodities, or a combination of all three. Exchange-traded funds give you the diversification benefits of mutual funds with the easiness of trading like stocks. Like all other financial products, ETFs do not have a one size fit all option. Therefore, it is important to evaluate different ETF options in terms of management costs, merits, disadvantages, and commission fees before finding the best one for your needs.
How ETFs work
ETFs work in three easy steps:
- An ETF provider in Singapore considers different assets, including commodities, currencies, stocks, and bonds, and creates a basket of these assets (ETFs). They use their market knowledge to know which assets work best together.
- As an investor, you can buy a share of the assets basket the same way you would buy a company’s shares.
- Buyers and sellers trade the ETFs every day on the exchange market, just like stock.
Types of ETFs
ETFs can be traded like stocks even though their trading styles are more like mutual funds and index funds. The type of ETF varies depending on the terms of the assets in the basket and the traders’ investment goals. Here are the most common types of ETFs. It is important to note that these categories are not mutually exclusive.
These are ETFs comprising mainly of stocks. These types of ETFs are meant for long term trading and growth. They are less risk than trading individual stocks even though they carry a higher risk of investment that most other ETFs.
Commodities refer to raw goods that are tradable. They include gold, cotton coffee, and crude oil. Commodity ETFs allow you to create a basket of these commodities and trade them as a single investment. Before trading in commodities, it is important first to know what is in them. Also, learn whether you have ownership in the physical stockpile of the commodity fund. It is also important to determine whether the commodities have future contracts and whether it can be considered a collectible by the tax collector. Considering these factors will ensure you fully understand the tax implications and risks involved in trading in a specific ETF.
Foreign stocks are some of the most recommended trading options for Singapore traders looking to build a diverse portfolio. International ETFs are easy to trade and less risky too. They give you an easy way of investing in foreign investments like US stocks and bonds. International ETFs can include assets specific to a country or specific county blocks.
Unlike trading individual bonds, ETF bonds do not come with a maturity date. Therefore, you can use this ETF to generate a regular cash source as an investor. The payment you get from bond ETFs comes from the interest generated from the bonds in the ETF. Bond ETFs are excellent, low-risk alternatives to stock ETFs.
Sector ETFs allow you to invest in companies in the main sectors that make up the stock market. When you buy sector ETFs, you get the chance to invest in specific sectors like finance, healthcare, or industrial, which would have been difficult otherwise. Sector ETFs are especially helpful to investors who are good at tracking business cycles during expansion and contraction periods. Often, sector ETFs come with higher risks than broad-market ETFs.