When is Bigger Actually Better?
Dear Penny Stock Millionaire,
I’ve alluded to some of the pros of trading large-cap stocks, but today I want to dive deep into the benefits of exactly why you would want to trade large-cap stocks.
Once we cover the upside of large-caps, I’ll review the disadvantages, and give you a few more tips about how you can trade them confidently.
Let’s get started.
Benefits of Trading Large-Cap Stocks
Plenty of Analyst Coverage
Because there are a lot of eyes on these industry leaders, they get plenty of attention in the press and from analysts.
Analysts will devote a lot of time and effort to researching stocks like Apple or Amazon. including whether it’s rated buy, hold or sell, and recommendations and suggestions.
You can benefit from their research and opinions, using it in addition to your own research to determine if the trade is worthwhile.
Slow but Steady Growth
What’s your risk tolerance? Not everyone has the stomach for trading small-cap stocks, which tend to be more volatile.
If this sounds like you, larger-cap stocks may be a better alternative. While this isn’t an absolute statement, they tend for the most part to offer more steady and reliable growth.
It can take a longer amount of time, but you’re less likely to experience the emotional ups and downs that can come with a smaller cap stock that may be spiking in either direction in big percentages in sometimes very short time frames.
Lots of Data
Large-cap companies are highly accountable in terms of filing earnings reports, and as such, there’s plenty of company data readily available in the public sphere.
Usually, these are companies that have been around for a while, so you could conceivably have decades worth of financial and technical data to sort through.
This can help you identify long-term trends and stock movement over time. If you see the same pattern repeating itself for years and years in a row, for instance, it’s even more likely that it will continue to repeat.
Many large-cap stocks offer dividends as an added perk to shareholders.
What’s a dividend? It’s a payment that’s issued by a company to shareholders, usually (but not always) on a quarterly basis. The dividends might be issued as cash dividends or stock dividends.
Why offer dividends? Since large-cap companies tend to have slower stock price movement, the dividends are offered as an enticement and token of appreciation for shareholders.
These dividends can be used to reinvest more funds in the same company, which means you can enjoy larger dividends as time goes on.
Room for Growth
Remember, these large-cap companies didn’t become industry leaders without good reason.
Typically, they are able to continue to lead and innovate, and in the case of stocks like the ones detailed above, there can still be room for growth.
Disadvantages of Large-Cap Stocks
Every rose has its thorn. Here are some of the potential disadvantages of large-cap stocks:
If you’re trading with a small account, one of the biggest disadvantages of large-cap stocks is the price point.
For example, at the time of this writing, Facebook stock is currently about $140 per share, Apple is in the low $170s, and Amazon is about $1,700.
Slower Account Growth
Slow but steady may win the race, but it won’t grow your account fast. Typically, large-cap stocks are better as longer-term investments, as opposed to small-cap stocks, which can grow exponentially and can offer a greater return in a short period of time.
However, small-cap stocks come with a greater level of risk, so there’s always a tradeoff.
Large-cap stocks are offered by companies that are better known, so there’s going to be a lot more competition from institutional investors.
With low-priced stocks, which are less interesting to bigger investors, there tend to be more opportunities for traders with small accounts. This shouldn’t rule out the possibility of large-cap stocks, but it should be taken into consideration.
Tips on How to Trade Large-Cap Stocks
Here are some additional thoughts on best practices for trading large-cap stocks.
Create Your Own Growth Stock Watchlist
If you want to make the most tactical trades possible, create a large-cap stocks watchlist.
A watchlist is an important tool for traders at any level. With large-cap stocks, it can help you identify which ones have the most growth potential.
The watchlist is your narrowed-down list of stocks that you’re considering for trades. You don’t want it to be huge, as it’s a shortlist of contenders.
You can think of it like a list of nominees for an Academy Award. These are just the best of the best, narrowed down from all of the choices out there.
This is the list that you’ll watch to see if any of the stocks meet your specific criteria to enter a trade.
Ideally, you’ll have created a basic trading plan for each of the stocks on your watchlist, including entry and exit points. This means that if any of them meet your criteria, you’ll be ready to pounce on the trade.
Set Stop Losses
Because large-cap stocks tend to be steadier and more reliable, many traders don’t think that it’s necessary to set stop losses.
Hey, remember the Titanic? People thought it was too big to possibly sink, but they were wrong.
That might be a dramatic example, but the fact is that even big companies can fail, and the stock prices can tank. Because of this, you’ve got to be careful about the possibility of loss, no matter how established the company is or how long it’s been around.
It’s important to cut your losses quickly with stocks of any size, so always set a stop loss. Maybe it’s a mental stop, or maybe it’s an actual stop-loss order. But make it part of your plan to determine at what point you will cut losses if things start going not your way.
Never Stop Learning
What if I told you there was one thing that you could do as a trader that will make you better at trading large-cap stocks, small-cap stocks, and everything in between?
It’s as simple as this: Never stop learning.
Knowledge is power in the stock market, and it will make you perform better in the market in the long run. I can’t promise that you will make or lose money on any trade. But I can promise that investing in knowledge is always a good decision.
The Bottom Line
Large-cap stocks can provide many opportunities for traders.
Offered by established companies and offering steadier and more reliable growth, large-cap stocks can be enticing for traders, especially if they don’t have a huge risk tolerance.
However, the higher price and potentially slower movement can make them more of a long-term strategy.
Long thought of as too slow-moving to have an impact on an account, there are plenty of opportunities for growth that don’t need to take years and years if you’re able to do the right research and identify the right opportunities.
Editor, Penny Stock Millionaires