Since You Asked
Here's something that's been too long in the planning: a question & answer column. Professional trader Don Bright of Bright Trading, an equity trading corporation, answers a few of your questions.
Don Bright of Bright Trading
TRADING NEWS STOCKS
Since oil has been in the news lately, does that mean that XON and other oil companies are newsies and would not be good to trade? Or does the news have to be about the company directly before you would want to not trade it? -- J.L., Salt Lake City
It is true we don't recommend trading "news stocks," but the news must be specific to the company. The opposite is true when underlying news (such as oil prices or the supply figures) will have a direct effect on stocks in several sectors (oil companies, oil services, distributors, airlines, and so on). The same is true for gold stocks, and any other group that trades around a commodity.
I am interested in Archer Daniels Midland (ADM), but I am afraid that its price, around 9, is too low even though its volume is more than two million per day. I am assuming the reason you recommend stocks over $50 is so there is plenty of room for movement, thus creating volume, action, and so on, in the stock. -- No Name Given
We wouldn't recommend trading such a low-priced stock, since a major percentage move is required to make any significant money. Most new traders are advised to trade stocks in the $40-100 range. Many traders get "wooed" into trading low-priced stocks due to lack of capital, and to do so is generally a mistake.
MARKET INDEX COMPONENTS
How do I go about finding the stocks that make up the various indices? Other than the Standard & Poor's 500, I have had no luck. -- No Name Given
You can go to the Chicago Mercantile Exchange (CME) Website (www.cme.com) to find information on many of the products, including the components of the major market indices. Search for "major market index component stocks" and you will see a great listing. Other indices can be found on the American Stock Exchange (AMEX) at www.amex.com.
If you're daytrading, wouldn't it be better to trade lower-priced stocks where the percentage gains and losses would be larger than in higher-priced stocks? Sort of another form of leverage? Assuming you have good liquidity in the stock, of course. -- No Name Given
Lower-priced stocks are generally less liquid, so you cannot trade in blocks big enough to make an equal amount of money trading a higher-priced stock. Example: With 1,000 shares of a $20 stock, moving 1% or 20 cents, you make $200. With 1,000 shares of a $100 stock, moving 1% or $1, you make $1,000. You can easily get in and out of the larger-priced, high-capitalization stocks, which is not always the case with lower-priced, less liquid stocks.
Don Bright is with Bright Trading (www.stocktrading.com), a professional equity trading corporation with offices around the United States. E-mail your questions for Bright to Editor@traders.com, with the subject line directed to "Don Bright Question."
Originally published in the January 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.
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