There are thousands of stocks you can trade in every day. If you are primarily in the United States, you have access to more than 4,000 publicly-traded firms. You can also trade or invest in thousands of over-the-counter (OTC) stocks.
Similarly, if you have an international trading platform like Day Trade the World (DTTW), you can trade in tens of thousands of firms.
While you can trade in any public stock, the reality is that some companies simply don’t make good trading options. Let us look at some of these firms.
How value investing works
Value investing is the process of doing your research and finding companies that are undervalued and then investing in them for the long term. Investors use several strategies to find whether companies are value investments or not.
Related » Value investor vs Trader
For example, some use the approach of comparing valuation multiples like price-to-earnings
(PE) and price-to-sales (PS). The idea is that similar companies should have similar valuation
multiples.
For example, if a company like Exxon has a PE of 5 while Chevron has 10, it means
that there is a reason why Exxon is cheaply valued.
Another approach is known as discounted free cash flow (DCF). This is the process of valuing a
company based on the present value of cash flow.
How day trading works
Day trading is significantly different from value investing. It involves analyzing charts and then
opening short-term trades. The rule is that a day trader should not leave a trade open overnight.
Day traders do not focus on the overall fundamentals of a financial asset. For example, they
don’t care about whether a company is profitable or not. Instead, they only focus on how the
asset’s chart is moving. In fact, most traders focus on companies that don’t have solid
fundamentals.
Day traders base their positions on technical analysis, which involves the use of technical
indicators like moving averages and the Relative Strength Index (RSI). They also focus on chart
patterns like triangles and head and shoulders patterns.
Stocks good for trading
Many big companies like Aon, Berkshire Hathaway, and Humana are usually good for
investments but not for trading. For one, a stock like that of Berkshire goes for over $500k, making it out of reach for many day traders. Stocks that are good for trading have several
characteristics:
- Highly liquid - These stocks should have adequate volume, which means that one should
be comfortable buying and selling. - Volatile - Ideally, you should focus on companies that are highly volatile. You will find
market opportunities amid this volatility. - Hype - In most cases, you should trade stocks that have hype among traders and
investors. For example, trading companies like GameStop and AMC during the meme
stock mania was a very profitable strategy.
Stocks good ONLY for investing
Berkshire Hathaway
Berkshire Hathaway is one of America’s biggest conglomerates. It is run and managed by Warren Buffett, who is widely-known as the world’s best investor. The class A shares of his company trade at $347,400 while class B trade at $235.
Most importantly, Berkshire’s stock has gained by more than 1,012% since 1996, making it a top-performer.
However, in reality, trading Berkshire Hathaway’ stock is not ideal because of its low volatility. Also, for most people, trading the company’s class A stock is out of reach because of how expensive it is.
Therefore, if you want to make money on Buffett, the best approach is to just invest in the stock.
Apple
Apple is the biggest company in the world in form of market capitalisation. It is also one of the most profitable and most recognizable brands. The stock, which was trading at $115 at the beginning of 2021, has climbed by more than 55% in 2020. It has also gained by more than 300% since 2015.
While Apple is a good company, we don’t think it makes a good stock to trade because of its low volatility. As you can see in the five-year chart below, the stock has been in an overall upward trend, with only a few pullbacks. For a trader, that means making less amount of money.
In the long-term, however, Apple is a good investment because of its strong global presence, its strong balance sheet, its stable dividend, and the scale of its domination.
Amazon
Valued at more than $1.6 trillion, Amazon is the third-biggest company in the world. The firm’s primary product is its e-commerce portal that allows people to buy almost anything. It also has more than 100 million subscribers of its Amazon Prime service that costs about $100 per year.
Still, its fastest-growing business is AWS, which provides cloud computing products to companies.
The firm has been a key beneficiary of the pandemic because of the shift to e-commerce and cloud computing. Its strong performance and the scale of its business makes it a good long-term investment.
Why Amazon is not good for day trading?
However, there are two main reasons why Amazon is not a good company to trade in. First, its stock trades at $3,195, which makes it a bit expensive for most traders. Second, Amazon’s shares lack the volatility that is required for day traders.
Now that we have looked at three well-known companies you should not trade in, let us look at one that you should consider trading in. This is just an example but it includes the qualities of all tradable companies
Example of tradeable company: Blue Apron
Started a few years ago, the company revolutionised an industry that many people didn’t think needed to be disrupted. When the company IPOed, its stock sored to more than $150. However, today, it has declined to $7.
As such, Blue Apron is a good investment because of three main reasons. First, it is mostly owned by retail investors, who tends to be more active. Second, at $7, anyone can trade the stock profitably. Third, Blue Apron tends to be more volatile than other large-cap stocks.
Final thoughts
Mega-cap stocks like Microsoft and Apple are usually good companies to own for the long-term. However, because of their expensive share prices and low volatility, they tend to be miserable companies to trade in.
Ideally, we suggest that you focus on small and medium-cap stocks as a day trader.
External useful Resources
- What is a Mega Cap Stock? - Investopedia
