ETFs for Beginners: How to Start Investing in ETFs

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ETFs for beginnersETFs for Beginners: Interested in the ETF market but not very familiar with this investment product? Index trackers are among the most profitable investments on the stock market. If you are taking your first steps in buying ETFs but don’t know where to start, follow this ETF guide for beginners.

ETFs for Beginners: What Are ETFs?

ETFs, or exchange-traded funds, are investment funds that replicate the performance of a stock market index. They are made up of a basket of stocks or bonds from several companies. Just like shares, ETFs are traded on the stock exchange. They can be bought or sold at their current market price. Their value can therefore rise or fall depending on how an index moves, which allows traders to bet on a potential rise or fall in price in order to generate gains.

If this topic interests you, also read “ETF Definition“, “CFD vs ETF” and “ETF“.

How Do ETFs Work?

  • A basket of hundreds of securities: A beginner-friendly ETF tracks an index that groups together several companies from the same sector or region. It can therefore cover the entire stock market of a whole continent or be limited to one particular sector.
  • Indices made available to market makers: An ETF is created through close collaboration between the provider and market makers. For example, a provider such as iShares creates the index, while market makers buy units that will then be sold and traded on the exchange.
  • A changing composition: Depending on the criteria set by the index provider, ETFs undergo quarterly reviews that may lead to one or more companies being replaced by new ones.

How to Buy ETFs

  1. Choose a reliable, well-regulated broker
  2. Fill in the sign-up form on the platform
  3. Make a first deposit
  4. Start buying the ETF of your choice.

ETFs for Beginners: Understanding an ETF’s Name

An ETF’s name is generally made up of:

  • The name of the ETF issuer, such as Amundi, iShares, Lyxor, BNP Paribas, etc.
  • The stock market index, sometimes combined with a strategy theme (CAC 40, DAX 40, Nasdaq, etc.)
  • The indicator that identifies the type of index (NR: Net Return, DR: Dividends Reinvested, PR: Price Return, etc.)
  • Some include the UCITS label, a European directive for harmonizing financial markets.
  • The “Acc” or “Dist” label, which reflects the ETF’s dividend distribution policy.

What Are the Different Types of ETFs?

  • Asset-class ETFs: These beginner-friendly ETFs invest in asset classes such as stocks, cryptocurrencies (e.g. Crypto ETFs), bonds or commodities (e.g. Oil ETFs).
  • Sector ETFs: This category groups stocks from specific sectors such as technology, the automotive industry, healthcare, etc.
  • Geographic ETFs: They focus on securities from a specific region, country, economic area or continent, such as the CAC 40 (e.g. Lyxor CAC 40 ETF), the Dow Jones, etc.

How to Choose an ETF

  • The stock market index: Choosing the index is a key step, as it determines the group of stocks in an ETF. Among the best-known indices, you can for example choose the MSCI World, the S&P 500, the CAC 40, the Dow Jones, the Nasdaq (Nasdaq ETFs), the Nikkei 225, etc.
  • Assets under management: This refers to the amount of money invested in an ETF. Checking assets under management gives you an idea of an ETF’s size and its profit potential.
  • Fund domicile: Information about where an ETF is domiciled can help you benefit from slight tax advantages. When choosing an ETF as a beginner, favor funds set up in the European area, among other things.
  • Fees: This is another criterion not to underestimate when selecting an ETF. Besides the brokerage fees you pay, you should look into the management fees, which vary from one ETF to another.
  • PEA eligibility: Depending on how many years you want to hold your trackers, investing in ETFs through a PEA (the French tax-advantaged stock savings plan) gives you certain benefits, including much lower costs and a more attractive tax framework.
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The Benefits of Investing in ETFs

  • A good way to diversify: By investing in an ETF, you can buy hundreds or even thousands of securities at once without placing multiple orders. It is an attractive way to diversify and manage risk better.
  • A liquid market: The ETF market is so liquid that it lets you buy or sell very quickly. Trading volumes are high, which keeps transaction costs reasonable.
  • Affordable costs: Compared with other financial instruments, buying ETFs is considered a rather cost-effective investment. If you invest in the S&P 500, for example, you put your money into 500 companies while paying a single brokerage fee.

The Risks of Trading ETFs

  • Index fluctuation risk: Stock indices are volatile and can swing sharply up or down, so your price forecast may turn out to be wrong.
  • Risk of losing your invested capital: Depending on price movements and how much leverage you use, you run the risk of losing money, possibly the entire capital invested.

Strategies to Start Trading ETFs

  • Buy and Hold: This strategy lets investors hold ETFs over the long term without worrying about market price fluctuations.
  • Momentum: This involves betting on rising sectors or asset classes in order to sell the ETFs once they have reached a peak.
  • Market timing: This strategy requires using technical and macroeconomic indicators to spot price movements in financial markets.
  • Dividend ETFs: With this strategy, traders invest in several companies that pay dividends, which can be reinvested or paid out in cash depending on the type of ETF selected.

ETF Trading Styles for Beginners: Which One to Choose?

  • Scalping: A trading technique that lets investors make small profits repeatedly throughout the day. Scalping is mainly suited to trading ETFs over the short term.
  • Day trading: This involves buying ETFs and selling them within the same trading session. With day trading, the trader usually holds a position for a few minutes to a few hours and closes it the same day before the market closes.
  • Swing trading: This speculative strategy lets traders hold a position for a few days to follow how its value develops. Thanks to the liquidity and volatility of ETFs, swing trading can help beginner investors make attractive gains.
  • Position trading: If price swings stress you out and you want to invest in ETFs over a long period, position trading lets you hold a position for several weeks, months or years depending on how the value of your chosen ETF evolves.

Which Trading Indicators Should Beginners Use?

  • Moving averages: This technical analysis tool lets you examine an ETF’s price movements to identify the latest market trends.
  • Momentum: This technical indicator shows the direction of an ETF’s price and how it is evolving, to help you determine the right time to buy.
  • RSI: Another indicator used to find out whether an ETF is oversold relative to its fair value.

ETFs for Novices: 5 Tips for Investing in ETFs

  1. Start with the major stock market indices.
  2. Put your money into highly liquid ETFs.
  3. Define an investment strategy before opening a position.
  4. Diversify your portfolio to reduce risk.
  5. Don’t overlook tax issues.

When Is the Best Time to Invest in ETFs?

There is no real best time to invest in ETFs. The earlier you start investing, the more gains you will accumulate over time. Whatever the timing, it is always important to pick the best ETFs for beginners. This allows you to generate profits over the long term and diversify your portfolio.

As for trading hours, the market is open daily from 9:00 a.m. to 5:30 p.m. You can therefore open or close a position at any time during the day. However, remember to carry out a market analysis and open a buy position when prices are at their lowest.

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