It’s no surprise that many investors are turning to ETFs today. Of course, investors like investing and trading where they make money. Therefore, exchange-traded funds must be a great way to make money. In fact, they are probably the simplest ways that you can use to build wealth as an investor.
If you’re considering investing in them, you need to understand how they work and how to make money with ETFs. Fortunately, this article will discuss all this in detail. Read on to learn how to safely invest in ETFs and make money during these volatile economic times.
How Do ETFs Work?
You can invest in ETFs in various ways. Furthermore, many different management methods exist that you can apply to ETFs. While some methods will work best during stable economic times, others will serve you best during hard, tumultuous economic times like now.
ETFs operate a lot like investing in mutual funds. However, unlike with mutual funds, where you only trade at the end of the trading day, you can trade ETFs at various intervals all through the day.
A trader keeps an eye on how the prices are fluctuating. Then depending on the price, they determine the right time to purchase or sell.
A trader can apply either of these criteria on their trading—market or limit orders.
Knowing the method that best fits specific times is vital. That way, you can mitigate the risks tied to different market circumstances and continue making money.
Investing in ETFs and Earning During Volatile Economic Times
We are living in a world that’s facing some of the worst challenges of our time. The Covid-19 pandemic, changing weather and climate patterns, violent political environment all are having an impact on our day-to-day lives. It’s not the easiest of times for everyone, investors included.
You can expect that these situations hurt the economic climate. That means even exchanges can feel the effects, leaving investors full of doubts about proceeding with so much market volatility.
Fortunately, ETFs have several methods that you can use during such economic times and continue making money. These include:
#1 Avoiding Opening and Closing Trades
With ETFs, the opening and closing of the market equally come with varying opening and closing prices. During such volatile economic times, you should anticipate what might happen during the trading day, based on the event of that day or the previous night.
Imagine placing an order at closing, only for something to happen that twists things, raising the price? Chances are you’ll pay much money for the purchases or end up receiving relatively little on trades.
It’s recommended to start trading at least an hour after the market opens and stop about an hour before closing. You’ll have avoided the times when ETF price swings mostly happen.
#2 Go for Limit Orders Rather than Market Orders
During such tumultuous times, it’s better to use limit orders and avoid market orders. With limit orders, you get to set low and high prices on your trading assets.
As such, you can mitigate the risk by putting a selling or purchase price not higher than what you can afford to lose or spend.
Since a market order only allows a purchase at the price that’s next best, the risk of the pricing being too high to afford or the selling price being too low, resulting in great losses, is high.
#3 Keep in Mind Discounts and Premium
ETFs trade at a discount when the market price falls below its intraday net asset value (iNAV). On the other hand, they trade at a premium when the cost exceeds its iNAV. So, what should you do to keep making money?
You need to understand a security’s iNAV. As such, you’ll avoid selling at a discount or buying at a premium unknowingly.
How Do You Make Money with ETFs?
Now that you know how to minimize the risks with ETFs during volatile economic times like the present times, understanding how to earn with them will be easier.
Your ETF will make money depending on the kind of investment it holds. It may invest in:
- Commodities like silver and gold.
- An index
Like shares, ETFs make money in two ways:
#1 Dividend Payments
A dividend is a cash payment that a company pays to holders of their shares.
Suppose you invest in a stock ETF with a focus on a principal index. You only get the dividends at certain times of the year. It can be twice or even four times. Also, you’ll get the dividends from all the companies in which you have an ETF share.
When the issuer pays, they declare what type it’s so that your broker can factor in the 20% tax-deductible on all dividends received from shares. Then, you can receive your cash.
#2 Capital Gains
Capital gains simply refer to an increase in the stocks that your ETF owns (share prices). For instance, if your ETF costs you $200, and you happen to sell it at $240, you’ll have made a capital gain of $40.
Since this is the easiest way to make money with ETFs, most investors are investing in those ETFs, which are likely to increase in price in the future.
Regardless of whether you’re a beginner or a seasoned investor in the stock market, these are all tips to consider regarding how to make money with ETFs. And unlike individual stocks, where the risk of loss is very high, most ETFs are diverse. Therefore, even if one company’s stock deteriorates, the rest will ensure you still make money. Whether it’s through capital gains or dividends, you’ll most likely get a profit either way. You’ll rarely lose your investment.
Most investors are accumulating wealth with ETFs. The more money you can invest, the better because it gets easier to make money. Just ensure you understand the ETFs you’re trading in and the economic times you’re in. You can earn with this more diverse and guesswork-free way of investing when you do that.