May 19, 2024

A Complete Guide To Trading ETFs For Beginner Day Traders

Most investors have historically perceived ETFs as notorious for their lower dividend potential than actively managed online investments instruments. However, some investors who’ve dared to go against this notion have actually found these to be goldmines. The salient features of ETFs, encompassing diversification and intraday trading potential, can provide beginners with the right balance of risk and profit.

Why are ETFs suitable for investors just getting started with intraday trading?

  • ETFs are inherently diverse across many sectors and asset classes. This dilutes risk. Thus, new traders get to worry a little less about enduring huge losses.
  • Being passively managed, ETFs have a lower expense ratio than actively managed funds, like mutual funds. Thus, they’re suitable for beginners who may not be keen to start online investing on a lot of capital during the experimental phase.

What factors to look for in ETFs for intraday trading?

Not all ETFs would show significant price movements on a daily basis or be suitable for intraday trading. 

1. Liquidity:

It’s a measure that denotes how likely enough buyers will be available every time you want to sell an ETF without significantly affecting its market price. This concept also applicable when someone goes to invest in shares. Intraday traders should look for ETFs of high liquidity. High liquidity is denoted by:

  • High daily average volume: This means that many buyers and sellers of a particular ETF are available every day.
  • Tight bid-ask spread: The bid is the highest price buyers will pay. The ask is the lowest price sellers want to accept. A tight bid-ask spread means the buy and sell prices are close together. This allows intraday traders to execute trades closer to the current market price. Since there’s little room for overpaying or underselling, it’s excellent for beginners.

2. Transaction cost: 

Low transaction cost for an ETF is denoted by:

  • Lower expense ratios: This refers to how much you’ll pay in expenses for each rupee you invest. If you drain less in expenses, you retain more profits, which are important for intraday trading.
  • Tight bid-ask spreads: This minimizes trading costs on entries/exits.

What ETFs to start with?

1. Sectoral ETFs:

Certain sectors, such as healthcare, fintech, and others, can see seasonal uptrends and downtrends. This makes it easier for new traders to forecast in which direction their chosen ETFs will yield returns, enabling calculated risk-taking. Those who invest in stock may be more aware of these sectors and trends.

2. Index tracking ETFs: 

Indices encompass securities across various sectors. Index-tracking ETFs are thus efficient for those with limited sectoral market knowledge and tend to have higher liquidity.

3. Thematic ETFs:

Certain trends can cause market disruptions, which may sometimes be short-lived. Nonetheless, they increase the chances of witnessing greater changes in trading volume and price fluctuations. An example is cybersecurity ETFs hitting a 52-week high after the introduction of large language models, which many perceive as a cybersecurity threat. This was observed by everyone who used to invest in the share market in 2022-23. Thematic ETFs may see a sudden price appreciation after the occurrence of a related event. It’s important to note that thematic ETFs may be riskier than the former options.

To conclude, ETFs are a great starting point for intraday traders. They offer a balance of risk and profit while providing sufficient learning opportunities to understand how different assets work.