Knowledge about ETFs is abundant. Many articles, blog posts and books are written on the topic. However, sometimes it can be challenging to find answers to specific questions.
Many people already know that ETFs are traded like stocks, whereas they hold commodities, currencies or bonds. When you buy an ETF through your broker, you’re buying the stock of another company that is listed on the stock market itself. The price of this share changes all day long depending on supply and demand for it at any given moment. However, when you place an order to purchase an ETF, you’re buying a contract.
So How Long Do ETFs Take to Settle?
ETFs bought online settle immediately. ETFs bought on the phone or in a branch can take seven working days to settle – depending on the broker.
ETFs take time to be delivered as a physical share certificate needs to be sent by Royal Mail or courier. ETF shares are held at nominee name and don’t have your name on them, so you cannot receive them yourself from the postman. Instead, investors need to contact their stockbroker, who should arrange the transfer of ownership of ETF shares from one account holder’s beneficial owner into another’s very quickly – generally within a day or two. Although investors won’t own the underlying assets during this process, they will still receive dividends and other income, which is fed through to their accounts.
What Are the Benefits of Trading with ETFs?
There are many benefits to trading with ETFs, including tracking their underlying assets very closely. Buying an ETF means you will buy the asset it is tracking at close to its actual value. In contrast, stock prices can be volatile and may not always accurately represent the underlying company’s market performance. Another advantage of using ETFs is that they can give investors access to earnings from different countries without needing multiple investment accounts in different places.
ETF shares are traded like stocks, but there is a difference between buying them through your broker or over the phone via an advisor when it comes to settlement times. ETF share purchases bought online settle immediately; any purchase placed over the phone or in branch takes up to 7 working days to settle. Investors can receive dividends and income from their ETF shares as soon as their broker confirms the transaction. The delay in receiving ETF shares may put some people off who want immediate ownership of assets, but if you can wait a few days, an ETF could be a good choice for you.
What Are the Risks of Trading with ETFs?
There are several risks associated with ETFs, including that they do not provide protection against inflation and can incur brokerage fees. Some investors also choose to trade ETFs on margin via a stockbroker. If their investments decrease in value, they may be required to pay back some of the capital initially invested or face having additional borrowings called extra margin. When trading on margin, there is also a risk that your broker could go bankrupt, resulting in you losing all of your money.
This is a risk that can be managed by investing in stocks with high ratings, but it’s still a factor to consider.
If you do not have the capital available to buy an ETF, you can trade it on margin – which means borrowing money from your broker for this purpose. However, stock prices fluctuate, and if they go down while you have borrowed funds from your broker, you could be left owing them money. Some investors also choose to borrow money ultimately without a broker’s help – termed ‘cash-strapped trading’. This is popular because it means avoiding brokerage fees altogether. However, other costs are involved when deciding to cash-strapped trade, including risks associated with going into debt and interest payments to banks or credit card companies.
In Conclusion
Although not widely publicised or discussed, it can take up to 7 working days for a stockbroker to deliver your securities – even if you have bought them online. This is because delivery is not made instantly, especially when trades are placed over the phone rather than online. Dividends and other income may continue to come into your account during this time, so there’s no reason why your monthly budget will suffer.
