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ETF Academy ETF Trading: Makeup of the Market

ETF trading is not difficult, but there are a few points to take into account.

Understanding the secondary market

The secondary market is the marketplace where investors buy or sell securities that already have been issued. For instance, if you buy 20 ETF shares on a stock exchange, that’s a secondary market.

Role of the primary market

The so-called primary market comes into play when securities are issued for the first time. If a professional investor would like to buy, say, 50.000 shares of an ETF, typically these new shares will be created. They can be created by authorised participants and market makers (large institutions that transact directly with the ETF provider to create or redeem shares of an ETF). This ensures liquidity for even the largest transactions.

Limit orders: What are they? How do they help investors?

Limit orders: What are they? How do they help investors?

ETF trading generally is advisable through limit orders, rather than market orders. With a limit, you indicate the maximum price you are willing to pay for an ETF or the minimum for which you would like to sell the ETF. Limit orders will provide you a greater level of price control.

Market makers: Who are they? What role do they play?

Market makers are companies that provide liquidity to the market, ensuring that it’s easy to trade securities such as ETFs. They will provide a bid price (how much they will bid for your ETF) and an ask price (how much they ask to sell their ETF to you). Thanks to market makers, you can trade even though no other individual investor might be willing to conduct a transaction. The bid and ask prices typically are accompanied by volumes, leading to an order book; see the following example:

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Size Bid   Ask Size
100 22,21 USD 22,23 USD 100
2.400 22,07 USD 22,28 USD 2.400
200 22,05 USD 22,29 USD 200
200 22,02 USD 22,31 USD 200
2.400 22,00 USD 22,34 USD 2.400
200 21,95 USD 22,35 USD 200
100 21,90 USD 22,40 USD 2.400
100 21,85 USD 22,42 USD 200
100 21,80 USD 22,50 USD 1.900

Source: VanEck.

Bid-ask spread definition

The bid-ask spread is the difference between the price at which market makers will sell and the price at which they are willing to buy. Obviously, you can benefit from a low bid-ask spread as it will reduce your transaction costs.

Best hours to trade

Best hours to trade

A lot can happen overnight, which is why ETF investors generally should avoid the first 10 minutes of the trading day. Breaking news, market activity and morning economic releases all contribute to an early period of price discovery after the market opening, often characterized by heightened stock volatility, wider spreads and weaker liquidity. Afterwards, spreads tend to normalise and remain relatively stable for much of the remainder of the trading day.

If possible, ETF trading should be avoided during the final hour before the market closes. While one of the most active trading times of the day, frequently with boosted liquidity, the last hour of trading typically sees heightened volatility as well.

ETF trading both a science and art

ETF trading requires knowing just a few simple rules. You will get used to it!


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