The same principle is applied to trading stocks as trading currency pairs of the Forex market. It’s necessary to monitor and carefully analyze financial and political news. When making a decision to open/close a deal, one should rely only on solid information from official sources.
Stocks include three different categories and each of them is marked by some particular set of properties: spreads, liquidity, volatility, and average traded volume.
The most liquid and reliable stocks are called "blue chips". Other categories are mid-caps (marked by average liquidity) and small-caps stocks (the riskiest – low liquidity, high volatility, small traded volumes).
Traders that prefer trading stocks can be also divided into several different categories:
- Passive. As a rule, they trade "blue chips", but sometimes mid-caps and small-caps stocks as well. These traders pursue investment reliability and stable income.
- Active. They also prefer "blue chips", but quite often trade mid-caps and sometimes even small-caps stocks. These traders strive to get the highest possible profit, but don’t like to risk too much.
- Speculators are in search of quick profits as soon as possible, that’s why they trade the most liquid stocks, "blue chips".
A trader’s choice of stocks for trading is influenced by their trading strategy and attitude towards risks. Of course, stocks of such well-known companies as Apple, Google, Coca-Cola, IBM, Microsoft, General Motors do not always yield the highest possible profit, but they are surely not very risky. On the other hand, stocks of smaller companies may surprise you. It’s quite logical, because it takes a miracle to make Apple stocks skyrocket by 2-3 times, but a small retailing chain may quickly rise after opening several new shops and successfully providing promotional support.
As a result, “blue chips” are suitable for almost all categories of traders, but be careful when you trade mid-caps and small-caps stocks.