Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 8: Trading Costs]
When trading in ETFs or any other equity security, it is prudent to use limit orders, which put the control back into the hands of the investor.
Market orders, which buys or sells an investment at the best available price, may not implement trades on prices originally quoted. This is especially pronounced during times of high market volatility, as witnessed in recent years, or in securities with low volume trades.
Instead, ETF investors should utilize limit orders when buying or selling an investment. This way, the investor will never pay more than he or she intended. Limit orders are trades that specifically state how many shares are bought or sold at a specific price or better. For instance, a buy limit order can purchase an ETF at or below a stated price.