Buying exchange-traded funds is quite different than purchasing your standard mutual fund. ETFs can only be purchased via a broker and the process is similar to trading a stock. You can think of it as mutual fund that is traded like a stock. As with all stocks, you need to open up a broker account before you can actually start buying and selling ETFs. We will run through the breakdown of steps that help a new trader get started:
1. Find a broker
While you cannot personally buy a share of an ETF, you can find someone else to do it for you. This is the broker. To find a decent broker that is beneficial to your cause, you want to insure that it provides reasonable price rates. Look at various brokerages and compare the pricing; commission structure, maintenance fees and trading software fees are just some components you want to look at. It should also provide good customer service and a high quality trading platform. A broker that has good service will provide you with good advice and feedback. This is crucial in your development as a new investor/trader. If your looking for some top brokers in Canada, check out our article on the top discount brokers in Canada
2. Deposit money into your trading account
More often than not, you will be asked to deposit a set amount of money into the trading account of the broker before you are allowed to start trading. You should take some time to decide the optimal amount of money you want to invest or trade. Brokers usually have a minimum sum of money in which you need to put in, take this into consideration when choosing a broker.
3. Learning the trading platform
After you have secured a broker, you need to have trading platform/software that you use to communicate with the broker. Traditionally, this was done via telephone; a trader would call the broker and place orders over the phone. Today, this can be done immediately through trading platform software. There are many software solutions out there and once you have chosen one, familiarize yourself with it so that you will be adept at navigating through the various functions.
4. Placing the order
Since ETFs trade like stocks, the mechanics behind buying and selling a piece of ETF is similar. It usually involves market order and limit order. It is also important to note that ETFs can be bought on margin if you have maintained a margin account with your broker. This also means that for every trade you want to execute with your broker, you can borrow a certain percentage from the broker to buy the ETF. However, buying on margin is usually not encouraged for long term investment because of the high interest rates charged by the brokers. In intraday trading however, interest rates are not charged.