A Closer Look at ETFs
In the following guide, we’ll take a closer look at what ETF trading in the UK involves and how you can begin including this type of asset in your portfolio.
Before undertaking any trading or investment of ETFs – or any other kind of financial asset – it’s important to make sure you understand exactly what you are buying and selling. With this in mind, we’ll now go through the basics of what ETFs are and how ETF trading in the UK works.
What are ETFs?
An ETF is an exchange-traded fund – which is a term for a bundle of assets that is traded as a single financial asset.
ETFs offer in-built diversification, as they contain many types of assets, including stocks, commodities, and/or bonds. Effectively, these are combined and traded as a single entity that can be easily traded. On the surface, ETFs are akin to mutual funds but with one crucial difference: ETFs are listed on exchanges and can be bought and sold by day traders. In many cases, ETFs track a particular index, such as with the SPDR S&P 500 ETF Trust or the Vanguard FTSE Developed Markets ETF.
There are several different types of bonds available – usually grouped according to the type of asset predominantly contained within the fund. Bond ETFs, for example, include government and/or corporate bonds; Industry ETFs follow a particular sector, such as finance or manufacturing, Commodity ETFs usually include god, oil or suchlike; and Currency ETFs invest in forex.
An ETF can be traded via an online broker, which will usually offer access to other assets, such as forex or CFD trading online. As with any asset, an ETFs price will fluctuate throughout the day and traders seek to capitalise on this by buying and selling ETFs frequently throughout the day.
It’s important to be aware that trading ETFs is not synonymous with investing in ETFs. When you invest in an ETF, you are generally playing the long game and hoping the underlying assets will appreciate over time. ETF trading UK, on the other hand, is all about making quick trades – profiting on market volatility throughout the day.
Just as with bond betting, CFD trading of forex, ETF traders often use margin to maximise their returns. However, novice traders should note that some ETFs have in-built leverage and it’s important to know the difference between Leveraged or Inverse ETFs and using leverage offered by your ETF trading platform.
Leveraged ETFs magnify an index’s returns and are generally composed of derivatives (mainly futures and swaps) to be able to meet their daily target. This might be on a 2:1 or a 3:1 basis. When you trade on margin with your broker, you can invest in traditional ETFs that in themselves trade 1:1, but you can usually set the amount of leverage you wish to apply to the trade, depending on your ETF trading platform.
Novice traders should always approach leverage with caution. Whilst it can indeed amplify returns, it can also amplify losses.
How Much Do You Need to Know About ETFs?
There’s no denying that ETFs are a little more complex than single assets, but how much do you need to understand before you start trading? Most ETF trading websites will offer adequate educational resources for you to get up and running and it’s important to spend time conducting your research.
You don’t necessarily need to understand the exact mechanism behind how ETFs are listed or monitor the price movements of each asset contained in the fund. In fact, some ETFs contain hundreds of bonds, commodities and stocks so this would simply be impractical. However, ETF trading UK is all about information, so you should always strive to be learning more.
How to Start ETF Trading
If you’re looking to start ETF trading in the UK, then your first step should be to outline a basic strategy. This doesn’t have to be anything complex at this stage, but you should draw up a basic trading plan, including your daily or weekly budget, how often you plan to trade and on what days.
Once you’ve got your plan in place, then the next thing you’ll need to do is find a suitable ETF broker and open an account. This is usually a quick and easy process, although you will be required to submit a valid proof of address for verification and AML purposes.
When your ETF trading UK account is up and running, you’ll of course need to add some funds before you can start trading ETFs. Once again, this is usually a quick process and once funds have cleared into your trading wallet then you’ll be ready to start making trades.
Finding a Stocks Trading Platform in the UK
Choosing an ETF trading platform is something that requires a little forethought. However, thanks to our extensive broker reviews you’ll be able to find out all the details you need before taking the plunge.
Before you start, it’s a good idea to ask yourself a few questions to figure out what sort of trader you are and what you’re likely to need from a brokerage account. For instance, are you looking to trade other assets? If so, you might want to consider a platform that also offers gold trading live, for example, or a forex trading account.
Finding a good ETF trading platform is an essential first step in your trading career. As such, it’s worth spending the time making sure you find one that suits your individual trading objectives.
How We Test the Best Stocks Trading Websites
When our experts review an ETF trading platform, the intention is to provide an in-depth and unbiased view of each one. In order to achieve this, each broker is measured up against specific criteria.
Usability, Look and Feel
Each ETF trading platform will have its own look and feel. Whilst this might not seem important initially, it is something that can really make a difference – especially if you are new to trading and need an innovative user interface without any unnecessary clutter. Similarly, if you are planning to trade often, then it can’t hurt to find a platform that’s easy on the eye.
A good ETF trading platform should be easy to use, but trading can be a complicated business and you never know when you might need assistance. As such, our reviews include details of each platform’s customer support. This includes the contact channels available, average response time and efficacy of the assistance offered.
Fees and Charges
ETF trading in the UK will inevitably incur costs, but each platform has a slightly different fee structure. Some may offer commission-free trading, but they will invariably recover costs via the spread or other fees. To ensure there are no unpleasant surprises, our reviews include a thorough breakdown of the fees charged by each broker.
To start opening trades, you’ll need to fund your ETF trading account. Whilst many traders will be happy to use traditional methods like Visa, Mastercard or bank transfer, others may prefer platforms that support the latest e-payment options.
As noted above, there are a variety of ETFs on the market and availability will differ from platform to platform. What’s more, it’s not uncommon for an ETF trading platform to offer access to other financial markets, such as CFD and forex. Our review will include details of all assets supported by a given platform.
Licensing and Regulation
ETF trading in the UK is regulated by the Financial Conduct Authority and this means that any reputable ETF trading platform must meet its stringent requirements. Given the importance of licensing and regulation, it inevitably forms a key part of our broker reviews.
Tips & Tricks for Beginners
ETF trading in the UK is potentially very lucrative but beginners should always be aware that it carries risk. Trading, in general, is a numbers game – you might not win every trade but the idea is to win more trades than you lose, so you end up in profit. This can be achieved through a combination of research, planning and discipline.
Your ETF trading platform will give you access to the markets, but there’s plenty of leg work you can do behind the scenes to improve your chances of being successful. What follows is a few tips for those coming to the ETF market for the first time.
Find a Good ETF Trading Platform
This might seem like a no-brainer, but it’s essential to find the right ETF trading platform. Of course, you can switch between brokers whenever you like, but people tend to stick with what they’re used to, so getting things right from the start is your best bet.
Having read this guide, you should already have an idea of which features are important to you. You’ll also be aware of the importance of a platform having the right regulatory credentials. Aside from these things, it will really come down to personal preference. The good thing is that many platforms offer a demo account, so you can try them out before committing to one or the other.
Invest some time in checking out our reviews and consider whether each platform can deliver what you need it to.
Take Things Slowly
As we have already mentioned ETF trading, as with any other kind of investment, carries inherent risk. A classic mistake new traders make is looking for that big payout and making risky trades to try and ‘get rich quick’. This is, of course, a recipe for disaster and you stand a far better chance of being successful if you approach the markets with caution.
The key to successful ETF trading in the UK is a balanced approach. You’re never going to win every trade – not even the top-level traders do – but by having a strategy and sticking to it, you give yourself a much greater chance of success. The first step should be to take things slow. Plan your trades and avoid being tempted to cut corners by trying to get too much from a single transaction.
Trading is a numbers game. The idea is that you make multiple trades and end up in the plus overall. However, just as you should avoid trying to make single, big trades, you shouldn’t go too far in the other direction. Start off by making just a small number of trades daily or weekly – this will make it much easier to test your strategy and get to establish your trading style.
If you’re already familiar with trading platforms, then you’ll know the graph lines are never straight, as the price of an asset is in constant flux. Aside from learning about particular assets, traders need to understand ways in which prices are likely to move throughout the day.
Of course, no one can predict exactly how prices will move, but a good ETF trading platform will offer you numerous tools and metrics to keep track of things. These may include tools for identifying patterns in price movement, timing your trades or even following the trades of top-level professionals.
One of the most important tools you have at your disposal is the option to stop or limit orders. This means you can instruct your ETF broker to close a position automatically if the price goes past a certain point. This option becomes exceptionally valuable when you start to increase your trade volume or if you are unable to monitor your position for its entire duration.
ETF Trading – Conclusion
ETF trading in the UK is becoming increasingly popular. Whilst it may seem to be more complex than many other forms of trading, once you get down to it the mechanics of buying and selling ETFs are almost identical to those of any other asset. So, whilst its important to understand what ETFs are and how they work, you don’t need to know the finer technical details behind their operation to profit from trading them.
If you’re new to the world of ETF trading, or the financial markets in general, then you’ll find plenty of information to help you get started. Our broker reviews are a good place to start, as they will help you find the right platform and the best online broker for your trading needs. Many of the leading brokers and exchanges will also offer additional learning resources.
Any would-be traders should always remember that trading involves risking funds and returns are never guaranteed. But with a good strategy, careful planning and a little personal discipline, you’ll be giving yourself every chance of success in your ETF trading journey.
ETF Trading FAQ
🤓 What is an ETF?
If you’ve been involved with any kind of online trading, then you’ve probably noticed there are numerous asset classes that can be bought and sold. An ETF is effectively several assets bundled together and traded as a single entity. So how do they work? Our guide to ETF trading gives a breakdown of exactly what ETFs are and how you can include them in your portfolio.
🤔 What ETF trading?
Trading involves buying and selling of different assets for profit. ETF is just one such asset that is very popular with day and swing traders. Different brokers generally offer access to various markets, so you might find you can trade forex, ETFs, stocks and CFDs all in one place. Our handy guide to ETF trading will give you an overview of what’s involved as well as how you can get started.
🤷♂️ How is trading different from investing?
Many people use the terms trading and investing synonymously, but they are not necessarily the same thing. Whilst investing may involve making a transaction and buying an asset of any kind with the hope of profit is technically investing, the approaches of traders and traditional investors vary a great deal. We discuss these differences in more detail in our guides to stocks trading and day trading.
🤓 How do I find an ETF trading platform?
There are numerous online brokers and exchanges on the market and many will offer access to different financial markets. If you’re looking to start trading ETFs, then it’s worth having a read through of our reviews to find out which platforms can meet your needs. We give an impartial view of each operator, listing its key features as well as any relevant regulatory information.