• ETFs trade on the stock market just like corporate shares.stock market analysis screenshot image by .shock from Fotolia.com
  
  Exchange-traded funds (ETFs) are versatile trading vehicles of the stock market. An ETF allows an investor to gain exposure to a particular sector, commodity or index with the purchase of shares in a single ticker symbol. For example, "SPY" tracks all the stocks of the S&P 500, while "GLD" offers the same returns as the physical purchase of gold bullion. Trading an ETF is the same as trading a stock in most cases, but some rules are specific to ETF trading.
  
  

Margin

• Margin refers to the amount of capital necessary to complete a transaction. Most brokerage accounts over $2,000 in value use margin to reduce the cash requirements for a stock purchase. The trader may possess shares of stock that are worth much more than the actual asset value of the account. The Financial Industry Regulatory Authority (FINRA) made changes to the margin rules for ETF trading in mid-2009. These new rules apply specifically to leveraged ETFs. Traders have long sought the dramatic and volatile price action of leveraged ETFs to gain significant exposure to certain sectors. The "SKF" ETF is a double inverse fund that tracks the financial sector. When the overall banking industry experiences a decline in stock prices, this ETF rises at twice the rate of the industry's decline. Many others offer similar returns, including up to triple leverage. The 2009 margin rules required that leveraged ETFs increase the margin requirement by the same degree of their leverage. Thus the margin for SKF would double over its previous requirement.
  
  

Uptick Rule

• The process of "shorting" stocks is popular among active traders. This allows a trader to profit from a stock's decline by selling shares she does not already own and then buying them back later at a lower price. From 1938 until 2007 the law required that stocks only be shorted when they are on an "uptick." This simply means that the stocks were rising in prices, if even over a few seconds, before the short order was executed. Since the collapse of the stock market in 2008, there has been congressional discussions over restoring this rule. This would change the trading practices of many investors. However, the uptick rule does not apply to many ETFs. Regardless of the re-implementation of this rule, certain ETFs may be shorted at any time. This rule affects all index-based ETFs such as QQQQ and SPY, as well as sector-specific ETFs including XLF and XLE.
  
  

Income Tax

• Tax rules for ETFs are the same as stock transactions. When an ETF is sold, a profit or loss is realized that carries tax implications. Generally, a loss can reduce income taxes as a deduction, while a profit create a tax liability. As with stocks, the degree of this tax deduction or liability depends on the duration of the ETF position. Generally, an ETF that is held for more than one year is considered long-term and taxed at a lower rate. Short-term positions under one year are taxed at the marginal tax bracket of the trader's income and thus treated like regular income. The rules allow for losses to be subtracted from profits for a total net gain or loss at year's end.