Trading Stock-Market Indices
A stock market index is a statistical measure of the daily change in a broad portfolio of stocks. The first index was introduced by Mr. Charles Dow in 1896. In any stock index, each stock represents a percentage weight (%) of the overall weighting (100%). The weight of each index is usually based on the market capitalization of each company listed. Stock indices are used as a general measure of a stock-market trend but they can be traded also like any other financial asset. Trading stock indices instead of trading individual stocks have proved particularly profitable and that is why many mutual funds are imitating the composition of popular stock indices instead of making their own picks.
These are the most important stock-market indices in the world:
Dow Jones Industrial (US)
Nasdaq Composite (US)
S&P 500 (US)
Russell 2000 Index (US)
DAX 30 (Germany)
FTSE 100 (UK)
Hang Seng (Hong Kong)
CAC 40 (France)
Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average or Dow Jones includes 30 companies based in the US and it is considered the most important stock index in the world.
Table: DJIA Listed Companies (Weight over 5.0%)
Standard and Poor's Index (S&P 500)
The S&P 500 index is able to cover a broad area of the US economy as it contains the daily price changes of 500 listed companies. The 500 companies of S&P represent about 70% of the total US stock market value. The S&P 500 is weighted solely based on market capitalization. Note that the top 45 companies listed on the S&P 500 today count more than 50% of the index’s total weight. The S&P 500 includes stocks from many different industries such as financial, energy, the Internet, industrials, healthcare, and consumer goods.
Nasdaq Composite Index
The Nasdaq Composite Index is an index specialized in technological stocks. The index was introduced in 1971 and today contains 4,000 stocks (technology, biotech, financial, consumer, and industrial). The weight of each company listed on the Nasdaq Composite is based on its market value. There is also the Nasdaq 100 index which includes 100 non-financial companies.
The Dow Theory
Dow Theory is a creation of Charles H. Dow, founder and editor of The Wall Street Journal. After his death, Dow Theory has been represented by William Hamilton, Robert Rhea and E. George Schaefer.
The Basics of Dow Theory
Dow Theory is a method of analyzing and explaining stock market trends and long-term cycles. According to the Dow Theory, there are three market forces determining every stock-market movement:
(1) Master Trends
(2) Secondary Reactions
(3) Daily Fluctuations
Short analysis of these three (3) forces:
(1) Primary Trends
The Primary, or else Master Trend, reflects the long-term trend of the market which is either bullish or bearish. The bullish trends usually last longer (7-8 years) and the bearish trends are more intense (last 1-2 years).
(2) Secondary Reactions or Medium-Swings
For limited periods, the market can move away from its primary direction. These movements are called Secondary Directions. These ‘reactions’ of the market usually last from a couple of weeks to 3 months. A secondary reaction generally retraces from 1/3 to 2/3 of the primary price change since the previous secondary reaction.
(i) In case of a bearish market, a secondary reaction is called a ‘bear-market rally’
(ii) In the case of a bull market, a secondary reaction is called a ‘bull-market correction’
(3) Daily Fluctuations or Short-Swing
Daily fluctuations correspond to chaotic daily market movements which may last from a couple of hours to several days. These fluctuations are chaotic and thus they are unpredictable.
The Dow Theory Basic Mechanisms
The Dow Theory aims to signal changes in the primary market direction, and in order to achieve that mission, it uses two popular stock-market averages, DJIA (Dow Jones Industrial) and DJTA (Dow Jones Transportation).
(i) If one of these two indices changes its master trend, then this movement is evaluated as a secondary trend.
(ii) If both indices change their master trend, then the master trend of the market is considered as changed.
How can we define the Change of the Primary Trend?
There are many methods that can be used in order to distinguish a Bull from a Bear market. For example, many analysts use the 200-day Moving Average. If the market is above its 200-day MA then it is considered bullish, and if it trades below its 200-day MA it is considered bearish. Numerous other methods can be applied.
NYSE Tech 100 Index
The NYSE Arca Tech 100 Index is a price-weighted index comprised of common stocks and ADRs of technology-related companies listed on the US Exchanges.
NYSE Euronext, Inc. was a Euro-American multinational financial services corporation that operated multiple securities exchanges, including the New York Stock Exchange, Euronext and NYSE Arca (formerly known as ArcaEx).
NYSE merged with Archipelago Holdings on March 7, 2006, forming NYSE Group, Inc. On April 4, 2007, NYSE Group, Inc. merged with Euronext N.V. to form the first global equities exchange, with its headquarters in Lower Manhattan. The components were then part of IntercontinentalExchange, although it has now spun off Euronext (Source: Wikipedia).
The NYSE Arca Tech 100 Index
The NYSE Arca Tech 100 Index has a proven track record with a history going back to 1982 when it was launched by the Pacific Stock Exchange. The NYSE Arca Tech 100 index incorporates companies from several industries, including computer hardware, software, semiconductors, telecommunications, electronics, aerospace & defense, health care equipment, and biotechnology.
Trading Penny Stocks Basic Guide
What are Penny Stocks?
In general, Penny Stocks are stocks that trade below $5.0 per share. Penny Stocks are characterized by high price fluctuations in very short time periods. Trading Penny Stocks is very risky and it considered as the ‘Wild West’ of stocks investing. When a Penny Stock trades below $0.30 it is called as a Sub-Penny Stock.
Penny Stocks Characteristics
Here are the main characteristics of trading Penny Stocks:
(1) Priced below $5.0
(2) Trading in OTC Markets and not regulated by Securities and Exchange Commission (SEC)
(3) High Price Fluctuations in Short-Periods
(4) Low Daily Volumes
(5) High Distance between Buyers and Sellers
(6) High Risk / High Returns
(7) Not Suitable for Large Investors
(8) Low Reporting Requirements (increased risk of misbehavior)
(9) Can be used as ‘vehicles’ for not listed companies (in this case the price usually booms)
(10) The price of a penny stock can be easily manipulated by individual investors or a lobby.
Penny Stocks Orders
There are two major order types when placing a trade:
(1) Market Orders
You can use a market order to buy/sell a Penny Stock Share at the closer Ask / Bid price. The advantage of this order type is fast execution and the disadvantage is that you may fill your order in a much higher (when you buy) or in a much lower (when you sell) price that the current Market Price. Market orders can cause you great problems and they are suitable only when you are trading important news.
(2) Limit Orders
This order type can limit the price level that you will buy or sell a stock. The advantage of this order type is that you can be sure about the price that you trade will be executed. The disadvantage is the speed of execution. If you place your limit order in a high distance than the current market price, your order may need days or even weeks to be filled.
Wise investors are trading 95% using Limit Orders and 5% using Market Orders.