4 Common Mistakes ETF Investors Make

October 16, 2015

4. Mistake: Using market orders when trading ETFs, and not limit orders.

Think back to May 2010, when the infamous "flash crash" took place, or earlier this year, when a mini flash crash had ETFs plummeting 40-50 percent in a matter of minutes under net asset value. If you were trading ETFs with market orders, you were probably road kill during those events.

The easiest type of ETF trade is the market order. You pick up the phone and tell your broker you want to trade a certain ETF right now. That trade is then executed at whatever price the market demands. In other words, you might find yourself paying top dollar for that trade, or a price that doesn’t necessarily reflect the net assset value of the ETF.

That’s not the case in a limit order. With a limit order, you tell your broker the maximum price you're willing to pay for an ETF, or, if you’re selling, the minimum price you’re willing to accept. Those limits protect you from bad execution.

The challenge with limit orders is that the market may move away from your range, which means your trade might not be executed at all. Still, it’s a safety feature that protects you from watching your wealth vanish on a bad trade.

Contact Cinthia Murphy at [email protected].

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