There are a lot of reasons to trade large cap stocks and the exchange Traded Funds (ETFs) that track the broad sectors and regions of the world. It’s not without its tradeoffs, but for a lot of new traders it can make a lot of sense.
You will have to give up the goal of catching the next Google or Microsoft as a small cap which, against all odds, rockets to the very top of the market food chain.
The trade off is worth it for some people because of the following kinds of advantages that you get by focusing on the largest companies in the world and the broadest regions.
The advantages include:
1. Very narrow bid-ask spreads. This is the difference between what buyers are offering as their best buy price and what sellers are offering as their best sale price. By minimizing the slippage between the bid and the ask, you will not be penalized as much as you might be on a thinly traded stock or ETF where the bid-ask spread can easily be 10 to 20 times wider.
2. Liquidity: because of the enormous size of their market capitalizations, it is very hard for these companies to go bankrupt overnight. It can happen of course, but remember that the fall from grace of GM and Enron played out over many months, giving agile traders many opportunities to either protect them from harm or to profit from their fall.
3. Analyst coverage: because of the sheer size of the companies and the institutional interest in them, you can be sure that large cap companies have plenty of analysts covering their every move. You can debate on the merits and quality of analyst coverage, but if that is where you perceive your edge, then large cap companies have many analysts to choose from.
4. Institutional money must buy large caps in order to get fully invested and meet the fiduciary requirements of their stated investment strategies. Some of these institutions are so large that they simply must focus their buying and holding on large capitalization stocks, and so you can be sure that there is always a buyer in size out there somewhere to act as a cushion of safety for you.
5. Orderly behavior: because of the sheer numbers of interested buyers and sellers, large caps tend to trade in an orderly manner throughout the day and because they trade in tandem with the broader market to a large extent, you can effectively monitor positions with less concern over intraday volatility catching you by surprise.
There are as many styles of trading as there are traders. Trading large cap stocks and broad ETFs though is certainly a way that should attract many new traders looking to begin mastering the craft.