ETFs Definition – What are Exchange-Traded Funds? | CFI LB

exchange-traded funds (etfs)

Exchange-traded funds or etfs are investment funds that trade onvarious stock exchanges. etfs trade over a session (the course of one day of trading) and trading closes at its net asset value. the investment funds can comprise of various assets such as commodities, [bonds], or stocks and can only be bought or sold from authorised participants and then only in specified blocks of shares in the etf.

Etfs tend to track [stock indices] but may also consist of shares in various companies all of which may operate in the same industry sector such as a gold miners etf.

Traders need to take into consideration that there are numerous costs associated with this investment fund. two of these costs are:

 

  • commissions payable - the more one trades, the higher the commission to be paid from your investments. however, some platforms offer commission-free options.
  • spreading impact –meaning in most cases a loss is suffered as one would purchase at a certain price but the impact of [spreading] dictates that these shares have to be sold at a lesser price than what it was bought for, therefore it's advisable to go for a smaller spread.[limit orders] can be used to mitigate this factor.

 

Some of the key advantages of etfs include the fact that they are completely transparent, offer great diversification, they offer a reduced tax liability in most countries and lastly, a liquid market enables etfs to be bought and sold easily.

 

There are also several challenges associated with etfs that traders need to take note of. when derivatives are used with etfs, one party might not make good on the agreement between them and there is also the risk of tracking errors involved as etfs don’t always track their indices accurately.

 

key takeaways:

  • Etfs are investment funds that trade on stock exchanges.
  • Traders need to take into consideration the various costs associated with trading etfs such as the impact of spreading and commissions payable.
  • There are several advantages and disadvantages associated with etfs that traders need to be knowledgeable about.

 

CFI Financial Group is an award winning global financial markets provider with over 23 years of experience and regulated entities in several jurisdictions, focused on offering impeccable execution and trading conditions including very low spreads, professional services, dedicated support and powerful tools.
CFI Financial Group has regulated subsidiaries in
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CFI provides execution-only services and does not provide any investment advice. To make an investment decision, you cannot rely on the content of this website, or on any information, opinion, report or other materials (“Information”) you receive from CFI, or its representatives. Such Information is general and does not consider your objectives and your financial situation, thus they shall not be considered in any way as an express or implied promise nor a guarantee of any profit or limit of loss. CFI shall not bear any liability in case you used or relied on such Information. Please ensure that you make your own research and seek independent advice if necessary.

Forex and CFDs are leveraged products that incur a high level of risk. A small adverse market movement may expose the client to lose the entire invested capital. The majority of retail client accounts lose money when trading in CFDs. Please be aware of trading risks and that you could sustain a loss exceeding your deposited funds, even if a stop loss is used.

CFI Lebanon is regulated by the Banque du Liban and the Capital Markets Authority

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