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Why Trade Index Shares
(ETFs)
(Indicators based on the "advances" and "declines" concept)
Description: Exchange Traded Funds
(ETFs), index shares, ETFs, QQQQ, Nasdaq 100, DIA, Amex, index trading, indexes,
exchanges, portfolio, stocks, options, SPDRs, DIA, ETF, futures
I. What are Index Shares?
Index shares, also called Exchange
Traded Funds (ETFs), trade on the major stock exchanges like
ordinary stocks, but with one major difference: rather than representing
an individual stock, each ETF tracks an entire basket of securities.
The first index shares to be
introduced (in 1993) were Standard & Poor's Depositary Receipts -
also known as SPDRs (pronounced "spiders"). "Spiders" are traded
on the AMEX under the symbol "SPY". Following their successful launch,
numerous other ETFs followed, most notably the Dow Diamonds (AMEX:
DIA) – representing a basket of the 30 Dow stocks - as well as the
NASDAQ 100 index shares (formerly traded on the AMEX under the
symbol "QQQ; now traded on the NASDAQ under the symbol "QQQQ"). The
QQQQ, better known as the "cubes" or "cubes", track the NASDAQ 100
stock index. Even though the introduction of the "cubes" is fairly
recent (they were launched in March 1999), they have become such a
popular trading vehicle that their daily trading volume now rivals that
of most companies on the New York Stock Exchange. In fact, only three
companies on the Big Board are traded more briskly.
II. Why do we apply
technical analysis to indexes (indices) and exchanges, rather than to
individual stocks?
The mood of the market as a whole can
best be captured by the various indexes, because indexes tend to move in
concert with the broad market. Generally, the market dictates the
direction of a particular security or ETF (e.g., an index, sub-index,
stock, option, or futures contract), never the other way around. It
therefore makes sense to get a good grasp on what is happening at the
index or stock exchange level. For this purpose, we have found volume
analytics (applied to various indexes) to be an excellent vehicle.
III. Why trade index shares?
Index shares are highly versatile trading
vehicles - they:
- Provide access to an entire portfolio
of stocks with a single transaction: this is perhaps the
greatest benefit of ETFs – they give investors and traders
instant exposure to a diversified portfolio of stocks;
- Can be bought on margin: while we
generally do not advocate borrowing money to buy stocks, if
done using strict money management rules and by experienced
investors/traders, this feature of ETFs can prove highly
beneficial;
- Can be sold short, even on a down
tick (i.e., when the last sale price is lower than the
preceding sale price): this is another reason why investing
in / trading ETFs can be quite rewarding – and often provide
superior returns to mutual funds;
- Enable you to trade options and
futures on index derivatives;
- May be purchased and sold throughout
the trading day - in contrast to mutual funds, which are
priced only once per day (at 4 p.m.);
- Are not associated with high management
fees;
- Are easy and convenient to trade, as well
as highly liquid.
Given their numerous features and benefits,
the popularity of index shares has soared in recent years. In
fact, ETFs have become an entirely new investment category -
representing one of the most flexible, multi-purpose trading
vehicles available.
In summary: by trading an index (rather than
individual stocks), you eliminate numerous concerns, such as worries
about picking the right company, balancing industry weightings, or
incurring the costs of trading numerous individual stocks. Best of all,
you eliminate the traditional investor predisposition toward taking long
positions only (i.e., remove the bias to the upside), allowing you to
profit during bull and bear markets alike.
Copyright 2004 Highlight Investments Group.
All rights reserved. This material may not be published,
broadcast, rewritten, or redistributed.
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