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How are ETFs traded on the stock exchange?​​

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ETFs are traded on stock exchanges similarly to individual stocks, allowing investors to buy and sell shares throughout the trading day at market prices. This flexibility makes ETFs more accessible for active trading than mutual funds, which can only be bought or sold at the end of the trading day based on their net asset value (NAV).

How ETFs Are Traded on the Stock Exchange

1. Market Orders and Limit Orders: Just like stocks, investors can place market orders (buy or sell at the current market price) or limit orders (specify a price at which they want to buy or sell the ETF). This flexibility allows for various trading strategies.
2. Continuous Trading During Market Hours: ETFs trade continuously throughout the day, allowing investors to enter and exit positions as prices fluctuate in response to supply and demand, news, and economic events. This intraday trading is unique to ETFs and stocks, as mutual funds do not allow intraday trades.
3. Price Determination and Net Asset Value (NAV):
   • While an ETF's market price is determined by supply and demand in the open market, it is generally kept close to its NAV through a process called arbitrage.
   • Authorized participants (large institutions) play a crucial role by creating or redeeming shares to maintain the ETF’s price near its NAV. If the ETF price strays significantly from its NAV, they step in to capitalize on the price difference, bringing the market price back in line.
4. Liquidity and Trading Volume: ETF liquidity is influenced by both the trading volume of the ETF itself and the liquidity of its underlying assets. High trading volume generally means narrower bid-ask spreads, making it cheaper and easier to buy or sell ETF shares. However, even ETFs with lower trading volumes can remain liquid if their underlying assets are highly liquid.
5. Pre-Market and After-Hours Trading: Some brokers allow ETF trading outside of regular hours, in pre-market or after-hours sessions. However, these sessions often have lower liquidity and wider spreads, so trades can be more costly and may not fully reflect regular hours’ price movements.

Settlement Process

ETF trades typically settle within T+2 days (two business days after the trade date), similar to stocks. This means that investors gain ownership of the ETF shares two days after the trade is completed.

Summary

ETFs trade on stock exchanges with similar mechanisms to stocks, allowing for market orders, limit orders, and intraday price fluctuations. Their prices are generally aligned with the NAV by authorized participants, and they offer liquidity that can make them suitable for both long-term investors and active traders. This structure gives ETFs flexibility for a wide range of investment and trading strategies.

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