Page 1089 - How to Make Money in Stocks Trilogy

Buying Checklist 75

The average daily volume varies widely and can change over time for the
same stock. At the time of this writing, Google, for example, is trading
around 2.5 million shares on average every day, while Fleetcor Technologies
is trading much less, around 670,000.
Mutual fund managers tend to establish large positions, buying tens of
thousands or even millions of shares. That’s hard to do in a stock that only-
trades 50,000 shares a day. It’s easier to establish a meaningful position—
without driving up the price too quickly—in a stock that trades a few million
shares on average.
Also, when it comes time to sell, it’s easier for institutional investors to
unload their shares in a “liquid” stock—one that has a big pool of buyers and
sellers and trades in large volume. It’s much harder for fund managers to
quickly get out of thinly traded stocks: Their own high-volume selling can
quickly drive down the price, which either reduces their profits or increases
their losses.
Keep in mind that while any stock can be subject to a sudden price swing,
thinly traded stocks tend to be more volatile. It takes much less volume to
significantly impact the price of a stock that trades 50,000 shares a day than
one that trades 3 million.
So focus on stocks that trade at least 400,000 shares per day. A more con-
servative investor trying to reduce the risk of volatility might look for stocks
trading 1 million shares or more each day. One place to find such stocks is
the IBD Big Cap 20 (Chapter 7).

Funds Will Determine the Fate of Your Stocks
By now you understand that mutual funds and other institutional investors
account for the bulk of all trading, and therefore they ultimately determine
the fate of a stock. If they’re heavily buying, the stock will go up. If they’re
heavily selling, the stock will go down.
It’s the same for the overall market. New uptrends begin when these big
investors start buying aggressively and end when they start to sell.
People can talk about all kinds of fancy technical indicators and throw
around exotic Wall Street lingo, but that’s the bottom line. And that’s why it’s
critical you make sure (a) the market is in an uptrend, and (b) your stock
passes this section—and the “Chart Analysis” segment—of the Buying
Checklist before you invest.
It’s not that hard to do, and that little extra effort will go a long way to gen-
erating superior profits.