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How to buy and sell ETFs

Okay, so you know how to open an online broker account. The next step on your road to fully-fledged investor status is to actually purchase some investments.

In this article we’ll look at how to buy an ETF (Exchange Traded Fund).

What is an ETF?

Before we get giddy with over-excitement, a quick reminder as to what an ETF is.

ETFs are funds traded on a stock exchange, as the full-fat version of their name suggests.

As investors buy and sell the ETF throughout the day, their price will vary.

Strictly speaking this means the exact price you pay for the ETF depends on supply and demand, rather than on the value of the assets held by the ETF.

In practice though, there is very little difference between the price of a typical ETF and the value of the assets it holds. Any differences are almost always quickly arbitraged away.1

To be completely accurate, we should note there are some obscure and illiquid ETFs where pricing and asset values may not always align.

There can also be a divergence for brief moments in extreme market turbulence – again usually only with smaller ETFs, or those holding more exotic stuff such as rarely-traded corporate bonds.

Neither factor should concern a passive investor. We should be choosing ETFs that track broad indices, and watching Netflix rather than our portfolios when the market throws a wobbly.

The art of the deal

Let’s get trading! To start we need to navigate to the trading screen. We’re using Hargreaves Lansdown in our example, but the process is similar for other platforms.

First off, we need to find the ETF we want to trade. We find it by searching for its ticker symbol.

The ticker is the unique name given to each traded security on the stock exchange. You’ll find the ticker on an ETF’s factsheet, or perhaps from an article like our guide to low-cost funds for passive investors.

In the screen below we’ve typed in HMWO, which is the ticker for one of HSBC’s global equities ETFs:

Picture of a Hargreaves Lansdown's security search tool.

(Click to enlarge)

The platform finds the ETF and gives us the option to trade (that’s the green arrow in the picture above).

Next we’re taken to the dealing screen:

Picture of a buy and sell broker trading screen.

Woah! Let’s run through the information we’re being bombarded with here.

Nice spread

The first thing you might notice is that there is a difference between the ‘Buy’ and ‘Sell’ prices. The sneaky broker is charging you more to buy the ETF than you’d get if you wanted to sell it.

This is common to all exchange traded securities (shares, bonds, investment trusts and so on):

  • The bid/sell2 price reflects the market demand for the ETF. That is, what the market will pay for your holding.
  • The ask/offer/buy price reflects the market supply for the ETF. That is, the price the market will charge you when selling you their holding.

The difference between the two is called the bid-ask spread. This spread in effect represents the cost of trading in the ETF, ignoring any additional trading fees levied by your platform.

For our example ETF, the spread is very small at around 0.05%3. The ETF we’ve chosen is a large and highly traded security.

For smaller, less frequently traded securities, the spread can be much wider. This means trading such an ETF costs more.4

Dealing options

Going back to the screen above, we next see two further options – ‘Deal now’ and ‘Stop losses and limit orders’.

  • ‘Deal now’ does what it says on the tin – you’re looking to buy and sell at that moment in the market. The option to deal now is available during market trading hours. That’s 8AM to 4:30PM Monday to Friday for the London Stock Exchange.
  • Stop losses and limit orders are different. You don’t immediately buy and sell with these orders. Rather, they are instructions to sell or buy a security if it reaches a particular price, which you set yourself. The idea is you don’t pay more than you want for your chosen security, nor sell a holding for less than you want to get for it. Passive investors in large liquid ETFs can ignore all this, but The Investor has written an article about these more advanced trading options if you’re curious.

We’ll proceed to deal now. We fill in the rest of the details, double check them, and then press the ‘Place a deal’ button.

The Final Countdown

We’re now taken to the following rather intimidating screen:

Broker trade confirmation screen, with 15-second countdown.

You’ll notice there’s a big flashing countdown warning us that we have only 15 seconds to accept the offered price. There’s also a fair bit of jargon. We’ll get to that in a moment.

Don’t panic! Remember to keep breathing, and that you are not launching nuclear warheads.

All we need to do is take a few seconds to triple check we’re happy with the details – that we’ve got the right ETF, that we are buying, not selling, and the value of our trade.

Should the countdown elapse the trade simply expires and all we have to do is click the button to refresh our quote. So we needn’t rush.

We click ‘Buy’. A moment later our broker cheerily confirms the trade has gone through. It will show the details of the trade in a screen like this (and will also email or message you this information):

Screen confirming purchase of an ETF with an online broker.

Give yourself a mini fist pump. You’ve successfully bought your first ETF!

Jargon Busting

The last two screens saw a few new terms come up:

  • PTM Levy – This is an extra £1 charge made when you buy or sell London Stock Exchange listed shares with a total trade of more than £10,000. It’s used to fund the Panel of Takeovers and Mergers (PTM). The PTM levy is not chargeable on ETFs.5 So we didn’t pay a charge.
  • Commission – This is the fee our broker stings us with for buying or selling investments. Typically you pay a fee to deal in shares. Though some brokers don’t charge for trading ETFs. Ours does, billing us for £11.95.
  • Stamp Duty – Not to be confused with stamp duty on property (technically, that’s called Stamp Duty Land Tax), this is an additional 0.5% charge levied when you buy shares. You don’t pay Stamp Duty when buying an ETF. So again, we didn’t have anything to pay here. That leaves more money for us to compound over time – result!
  • Settlement Date – The date at which ownership of the security is transferred. We bought our ETF on 1/10/2018, and it won’t be settled until 3/10/2018. This delay is to reflect the process of legally transferring ownership between buyer and seller. In practice this isn’t a big deal – if you sell via your broker, the money will appear in your account and you can use it to purchase new investments. If you buy, the holding will appear in your list of holdings.6 For ETFs and shares, settlement is ‘T+2’ – that is, two days after the trading day. For Corporate Bonds settlement is T+2. For Gilts, T+1.

The Contract Note

All this information is formally set out on a record called a Contract Note. Your broker will provide this to you shortly after you complete your trade. Here’s a copy of ours:

Example of a broker's contract note.

You’ve bought your first ETF

So how was it for you? Hopefully you remembered to keep breathing when the 15-second countdown started and you’re still with us.

It’s really not that scary to buy and sell on the stock market. These days it’s no more complicated than buying novelty socks on Amazon.

Just remember to do your research in advance, and avoid getting drawn into day trading or other wealth-sapping activities. Make your well-researched investments, then go and do something fun and leave them to grow.

  • Are you ready to invest? Have a look at some low-cost funds we favour.

Read all The Detail Man’s posts on Monevator, and be sure to check out his own blog at Young FI Guy where he talks about life as a financially free twenty-something.

Series NavigationHow to find Exchange Traded FundsHow to buy and sell index tracker funds
  1. Arbitrage is when sophisticated investors with deep pockets buy one asset and sell another to pocket any anomalies in pricing. []
  2. These terms are used interchangeably by brokers and investing nerds. []
  3. Worked out as £0.01/£1.68 []
  4. The relationship between spread and ‘liquidity’ is very complex, something I spent a year of my life researching and investigating for work. I won’t get that year back. []
  5. It is not charged on Open Ended Investment Companies, aka OEICs, either. []
  6. Note that when it comes to dividends, you need to legally own the security on what’s called the ‘Record Date’ to be entitled to the dividend. []

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{ 17 comments… add one }
  • 1 dearieme October 24, 2018, 1:02 pm

    I trade so rarely that I’d forgotten the raw passion, the racing pulse, the sheer excitement of it all.

    But enough of such unwarranted sarcasm: thank you for the post. Might I make a request? Would you, someday, do a similar post on buying a gilt, please? Not an ETF or fund but an actual, particular gilt; I’ve not done that since the days of having to phone to do it.

  • 2 Steve the Lurker October 24, 2018, 3:06 pm

    None of my business, maybe, but are Hargreaves Lansdown happy for you to publish screens from their website without identifying them? (you left their phone number on one of the screens).

  • 3 The Investor October 24, 2018, 5:45 pm

    @Steve — To be honest I thought readers might mind a credit more than Hargreaves Lansdown would object, due to general platform partisanship etc. But on your feedback I’ve added a credit/link.

  • 4 Hari Seldon October 24, 2018, 6:53 pm

    The online brokers I use “appear” to allow online trading of gilts but I’ve always had to phone them….

  • 5 William October 24, 2018, 9:11 pm

    It would have been nice to include a line in respect of Vanguard Private Investor platform having the option to buy/sell etf’s without trading fee if content to have your dealing instruction bundled together in their bulk trades which I believe are actioned a couple of times each day. Small monthly contributions in to etf’s are cost effective using this facility whereas other brokers charge a dealing fee or offer a limited range of etf’s for regular monthly fees of £1.50.

  • 6 David Hourt October 24, 2018, 9:38 pm

    I am looking to transfer a core satellite isa portfolio from one broker to another and at same time move to more etf based portfolio.

    What are people’s thoughts on best approach to inimise treading costs and risks of being out of the market ?

    Thanks

  • 7 Soti October 25, 2018, 8:05 am

    Thank you very much for the nice article.
    I have noticed generally ETFs are more popular than tracker funds. In a similar fashion, investment trusts are preferred over OEICs. Why the appeal of the former over the latter!
    Thanks.

  • 8 Marc October 25, 2018, 7:34 pm

    Platform charges are much cheaper for ETFs than funds once you have more than 10k

    HL caps fees at 45 pounds in its ISA and free in its taxable whereas index funds pay an uncapped 0.45% per year

  • 9 SemiPassive October 26, 2018, 2:01 pm

    Dearieme, on Hargreaves Lansdown you can click the ‘Shares’ menu option (a bit counter intuitive) then search for ‘treasury’ rather than ‘gilt’. That then tends to bring back a list of specific gilt issues rather than funds or etfs. Clicking on them will show all the details e.g. redemption yield etc. Then click Deal to buy.

  • 10 dearieme October 26, 2018, 3:38 pm

    @ SP: for the normally competent HL that’s rather dud. So I am grateful for your tip.

  • 11 The Details Man October 26, 2018, 4:20 pm

    @William – It’s a good point with the Vanguard platform, though you are limited to Vanguard ETFs. The Investor wrote a comprehensive review when the platform launched about a year ago: http://monevator.com/vanguard-direct-uk/

    @David Hourt – For me, one of the big benefits of an ETF portfolio is there is reduced risk of ‘being out of the market’. In terms of the transfer, there are few easy answers. The process is, in my view, still unnecessarily burdensome on retail investors. Transfers between brokers can take weeks/months. You still hear some real horror stories! In theory, cash transfers are quickest. Selling all your investments into cash, then transferring and then rebuying as ETFs is likely to prove the most time-effective way to move between brokers and into ETFs. That might be more expensive than a gradual move into ETFs in terms of dealing fees. Don’t forget to consider any capital gains/tax issues for unsheltered accounts!

    @Soti – Thank you! Funny you say that. I believe The Accumulator is on the Index Funds side. I personally favour ETFs for three reasons: much lower platform charges (see Marc’s comment above); you can buy and sell throughout the day, so there’s lower out-of-market risk; and compared to closed-ended funds there’s no discount/premium to worry about. On a more techy-level, I like the redemption/creation basket system of ETFs as well as it’s a very liquid and efficient market making mechanism.

    @dearieme/SemiPassive – SemiPassive has beaten me to it. Surprisingly, HL’s search function/info for gilts is somewhat inferior to it’s competitors. The easiest way to find the information for trading gilts on their platform is to navigate via their ‘gilt’ page: https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/uk-gilts

  • 12 Andy October 26, 2018, 6:49 pm

    @David Hourt – If you want to minimise time out of the market then transfer investments between brokers without selling anything. Then make the switch in the new broker. It can take a long time for Unit Trusts and OEICs to be transferred in this manner, but at least you aren’t out of the market while the transfer takes place. Shares and ETFs are normally transferred much more quickly in my experience.

    When switching from Fund investments with the new broker you will have to take account of the delay between issuing the sell instruction on UTs and OEICs and the trade actually taking place.

  • 13 Jon October 28, 2018, 10:44 am

    Hi,
    I recently came across some outlandish spreads on iweb/halifax for many ETFs and investment trusts. When comparing with HL (which has tight spreads), I was shocked at some of the differences in price of ETF and IT for different brokers and the spreads they offer. Selecting broker for an ISA or SIPP is effectively a lock in (and anti competitive in the fees).

    one example there are many others:
    https://www.markets.iweb-sharedealing.co.uk/share-centre/etfs/detail/RBTX/IE00BYZK4552/0P00018NHW

    https://www.hl.co.uk/shares/shares-search-results/i/ishares-iv-plc-automation-and-robotics-ucits

    Is this correct?
    Are excessive spreads, large differences in price unethical/illegal and why are they not regulated to be in some sort of acceptable range (given consumers are locked in)?
    Is there a spread comparitor somewhere?

    Thanks,
    Jon

  • 14 The Accumulator October 28, 2018, 1:15 pm

    Whether ETFs are cheaper than index funds really depends on who you buy them with, how often and what asset class you’re buying. It’s a lot more nuanced then comments above. You should be looking at total cost of ownership not one component like platform charges.

    Ability to trade fast is of limited appeal to a long-term investor and may even be counter-productive if you’re tempted to trade the ETF of the day. For example, AI ETFs one minute, cannabis ETFs the next. I do think ETFs require more research from investors in comparison to index funds. It’s easier to wander into the woods if you don’t know what you’re doing.

    Overall, I’m pretty neutral about it. I just use the product that enables me to access an asset class in the cheapest, simplest, most transparent way possible.

  • 15 The Details Man October 28, 2018, 8:42 pm

    @Jon – Spreads are partially regulated. Every broker (or financial services provider) that offers execution services has to provide an explanation of their Execution policy. That is, how they obtain the best prices for their customers (‘Best Execution). Alongside this, most platforms provide the statistics and details of the brokers they use for placing trades.

    For example, this is the link to the HL execution report: https://www.hl.co.uk/shares/quality-of-execution-report

    With regards to the specific ETF you posted, that looks a little bit like a glitch and might be due to the market being closed. Certainly, the iweb pricing doesn’t look right.

    @TA – You are right, as ever! Identify the need first, then find the best product to fill that need. Not the other way around.

  • 16 Playing with Fire November 4, 2018, 7:58 am

    HMWO has whopping 3% entry and exit fees. My platform doesn’t show them apart from the KIID factsheet. Something to check before hitting the buy button.

  • 17 The Investor November 4, 2018, 9:04 am

    @Playing with Fire — There will be no entry/exit fees on that ETF for a normal investor like you or me. These ETFs are traded on the market, just like other shares, without any such fees.

    That entry/exit fee your seeing on the KIID will be there for institutions putting money in directly (though I forget at this moment why they would be buying from the fund manager and not just in the market, as a 3% fee is ruinously expensive these days!)

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