WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

One of the craziest weeks explained…

Hedge Fund nearly bankrupt as day traders attack wall street

In case you have been wondering why you have been seeing Gamestop (GME) and AMC in the news a lot this week, it’s due to the fact that these two failing companies nearly took out one of Wall Street’s biggest hedge fund managers in a span of three days. That’s just part of the story that also includes Reddit Users, Twitter Wars,  Elon Musk, Chamath Palihapitiya, Memes, and what may ultimately be an ugly ending for stock holders, even if you weren’t involved. 

Full disclosure, I did not buy into the $GME craze. In these cases if you’re initiating this type of pump, or you’re not already in it, it’s too dangerous to just “hop on” – while there were a few millionaires, and reportedly one billionaire made this week, the truth is someone will be left holding the bag at the end, and it won’t be pretty. 

I was however in $BB, and $NOK BEFORE all this started. Both of those stocks got sucked into the frenzy. So I did benefit and sold yesterday.  I was in these stocks for my own separate reasons. When they spiked, I took my profits and will look for future entries when all this subsides.

How is started…

It’s not entirely clear to me exactly how this started, but apparently an intrepid Reddit user discovered that Melvin Capital had a huge short position on $GME. This was key, since hedge funds are not mandated to report their short positions. As this information became publicly available, a user named WallStreetBets on Reddit, started using his forum to let people know he was buying the stock, and buying it big. People followed. Both regular stock and call options were purchased in great size. This caused two types of squeezes, the short squeeze, which causes anyone who bet short to buy back their shares. It also called what’s known as a convexity squeeze. Money makers need to keep a certain amount of stock on hand as it rises. Since money makers (the middle men in the stock market) had to join in the buying, it caused an endless feedback loop.

Retail investors bought shares/calls –> shorts had to cover –> money makers had to buy shares to have on hand to remain “delta neutral” – a lot of this was knew lingo to me as I do not short stocks and I am not really well versed in that section of the market. Matthew Kratter has a good video explaining what happened below.

While all this was happening, Melvin Capital, was in real financial trouble. Two other hedge funds had to come in to save them by investing billions in Melvin. Those other hedge funds were Citadel, and Point72. Citadel also happens to be one of Robinhood’s biggest clients, if not the biggest. So when Robinhood banned these stocks from trading this morning, there was quite an uproar from the trading community.

If the point of this whole exercise was to bring the Wall Street establishment to its knees, WallStreetBets and his followers definitely succeeded. If the goal was to bring about some sort of systematic change, they may also succeed in the long run, but maybe not in their favor. It’s too soon to tell at this point. 

 

How it’s going…

This story is evolving quickly. As of writing this article $GME has fallen about 50%, $AMC, $BB, and $NOK also faded hard from yesterday’s highs. 

Brokers Get Involved

This morning Robinhood, a popular investing app with millenials, along with several other large brokerage houses either restricted the buying and/or selling of all these stocks, or they were down completely for a period of time, thus reducing the volume of buying and selling and in some cases only allowing people to sell. This was market manipulation at the highest level! 

The exact thing that the hedge funds were accusing WallStreetBets of doing, they did to the little guys today. A class action lawsuit was already filed against RH today. We’ll see how this goes. 

Billionaires Cry Foul

It’s not surprising that most of the billionaires that went on CNBC today or yesterday were there to demonize the retail investor.  Billionaire, Leon Cooperman, saying it was an “…attack on the wealthy”. The CEO of Nasdaq tweeting that maybe brokerages should stop trading all together to allow huge firms to reposition themselves and quote “stop the spread of profits outside of wall street.” In other words, you don’t want the little guy to make money at the expense of the big guy. EXCUSE ME?!

So when my stocks take a nose dive can I ask a brokerage to halt trading for a couple of weeks while I reposition myself?  They would laugh me off their customer service line. A hedge fund can short a stock %140 percent (meaning shorted more than the available amount of shares) and completely wreck a company, but when the little guys does it to them, they’re calling it a crime. 

 

What happens now…

Unfortunately, nothing in my opinion. What’s done it done. The few lucky ones that got rich…congrats. The few that will be left holding this stock all the way back down…my condolences. Hopefully you cut your losses as quickly as you can. The report is that the hedge funds have already rebought their short positions now that $GME will almost certainly return to normal levels.

One big issue that became clear to retail investors this week was how blatant the game is rigged against us. If companies can randomly stop trading in an asset (other than normal trading halts) and completely remove them from being available at the whim of hedge fund who come crying to them, then what are we doing here? It clearly isn’t the “free market” economy that so many of these billionaires want to champion. It’s a rigged economy in their favor.

Hedge funds will likely look at ways of preventing this from happening again. By one estimate hedge funds lost $90 billion dollars this week trying to cover their short positions. The effect of that was them having to sell their long positions and causing the markets to drop (see 1/27) – a lot of good deals this morning if you were hunting for entry points.

Moving forward and learning from this week’s events.

I have learned to sit back, relax, and watch these events like a reality TV show. Not participating, sticking to your plan, and not getting caught up in stories like these are your best bet to keep your money safe. Unless you were lucky like I was with $BB and $NOK to already be in those stocks when it happened, I would avoid these types of moves in the future.

If you are itching for that excitement, in which case I would avoid the stock market altogether if I were you, you could hop on with a small amount to scratch that itch. Just don’t invest more than you are willing to lose. Way too much risk for me.

 

Nasdaq CEO Tweet
Humorous meme
WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

Understanding the 4% Rule – Setting Your Goals

Understanding the 4% rule – Setting your goals

You can’t get to your destination if you don’t know where you’re going

Early in 2019 I made my first trades in my entire life. I think I bought $KO, and $BEN, for no other reason than I knew Warren Buffet like $KO, and they paid a dividend, which sounded nice. I picked $BEN because they have a big headquarters a couple of miles from my house and their stock seemed cheap. I HAD NO IDEA WHAT I WAS DOING. 

More to the point, I had no idea where I was going. I didn’t have a goal in mind for my finances. I just knew I had $2500 from a retirement account and I wanted it to grow. Wanting an account to grow is a nice though, but it is hardly a goal. 

It wasn’t until earlier this year (2020) that I had an AHA moment. In one of the trading courses I took the instuctor casually mentioned the 4% rule, and how he planned to live off that in retirement. I will do my best to explain the 4% rule to you now, and how it can help guide your goals. 

The 4% Rule

The 4% rule simply put means that you should be able to live off 4% of your retirment account every year during retirement, while still growing your account, and not run out of money while you’re retired. Knowing your 4% will give you a target for how much money you will need in your retirement account in order for it to work. 

So how do you know what your 4% is?

Everyone’s 4% will be different. It may depend on many other factors like income, savings, pension income, social security benefits, inheritance, rental properties, owning a home, age, etc. My current goal is based on the following criteria.

  1. I need to own a home outright and not have mortgage payment each month.
  2. My wife and I’s combined needs will have to be taken into account. (she also has a retirement account we will be able to pull from)
  3. We won’t have any personal debt. We currently don’t have any CC debt and hope to keep it that way. Just day to day expenses.
  4. I would ideally like to retire in CA. and not move to a “retirement friendly” state. Just a personal preference. 
  5. Knowing all of that and taking into account inflation, I would think my wife and I would be able to live off $100-120k per year and lead the life we want to lead. 
  6. That means I need to be able to withdraw $50-60k per year from my account. 

Now we do math. I know, math sucks. $60/x = 4%/100 – Cross multiply, divide, yadda, yadda, and I come up with x=$1.5 million. 

That it’s. That is my magic number. I need $1.5 million in my IRA by the time I retire in order to be able to pull out $60k/year and still grow my account. 

Now that I know my magic number I can work backwards and figure out how much money I need to add to my IRA yearly (hopefully you are maxing out anyway) – and how much I need to grow my account every year to reach the goal. 

In essence you have given yourself a high level map to your destination. Now you know where you’re going. How to get there…well, that’s a whole lot more complicated.

So why 4%?

We are basing the 4% rule off the notion that a well diversified portfolio exposed to stocks and bonds will give an average return of 6% per year. If  you’re pulling out 4%, but making 6% then you’re still up 2% each year. Remember though, that is an average. There are years when the markets may lose money, and there are years where the market may go nuts and make you 10-15% returns. 4% is just a guide. 

Beyond the 4% rule

The following section is advice from Schwab and not my own.

However you slice it, the biggest mistake you can make with the 4% rule is thinking you have to follow it to the letter. It can be used as a starting point—and a basic guideline on how much to save for retirement—25x (or the inverse of 4%) of what you’ll need in the first year of a 30-year retirement from your portfolio. But after that, we suggest adopting a personalized spending rate, based on your situation, investments, and risk tolerance, and then regularly updating it.

How do you determine your personalized spending rate? Start by asking yourself these questions:

  1. How long do you want to plan for? Obviously you don’t know exactly how long you’ll live, and it’s not a question that many people want to ponder too deeply. But to get a general idea, you should consider carefully your health and life expectancy, using data from the Social Security Administration and your family history. Also consider your tolerance for managing the risk of outliving your assets, access to other resources if you draw down your portfolio (for example, Social Security, a pension, or annuities), and other factors. This online calculator can also assist you in determining your planning horizon.

     

  2. How will you invest your portfolio? Stocks in retirement portfolios provide potential for future growth, to help support spending needs later in retirement. Cash and bonds, on the other hand, can add stability and can be used to fund spending needs early in retirement. Each investment serves its own role, so a good mix of all three—stocks, bonds and cash—is important. We find that asset allocation has a relatively small impact on your first-year sustainable withdrawal amount, unless you had a very conservative allocation and long retirement period. However, asset allocation did have a significant impact on the portfolio’s ending asset balance. In other words, a more aggressive asset allocation had the potential to grow more over time, but the downside is that the “bad” years were worse than with a more conservative allocation.

     

  3. Asset allocation can have a big impact on a portfolio’s ending balance Source: Schwab Center for Financial Research. Assumes a constant asset allocation, a 75% confidence level, and withdrawals growing by a constant 2.19%. Assumes a starting balance of $1 million. Confidence level is defined as the number of times the portfolio ended with a balance greater than zero. See disclosures for additional disclosures on allocations and capital market estimates. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product and the example does not reflect the effects of taxes or fees. Remember, choosing an appropriate mix of investments may not be just a mathematical decision. Research shows that the pain of losses exceeds the pleasure in gains, and this effect can be magnified in retirement. Picking an allocation you’re comfortable with, especially in the event of a bear market, not just the one with the greatest possibility to increase the potential ending asset balance, is important. We think aiming for a 75% to 90% confidence level is appropriate for most people, and sets a more comfortable spending limit, if you’re able to remain flexible and adjust if needed. Targeting a 90% confidence level means you will be spending less in retirement, with the trade-off that you are less likely to run out of money. If you regularly revisit your plan and are flexible if conditions change, 75% provides a reasonable confidence level between overspending and underspending.

  4. Will you make changes if conditions change? This is the most important issue, and one that trumps all of the issues above. The 4% rule, as we mentioned, is a rigid guideline, which assumes you won’t change spending, change your investments, or make adjustments as conditions change. You aren’t a math formula, and neither is your retirement spending. If you make simple changes during a down market, like lowering your spending on a vacation or for expenses you don’t need, you can increase the likelihood that your money will last.

     

  5. How confident do you want to be that your money will last? Think of a confidence level as the percentage of times in which the hypothetical portfolio did not run out of money, based on a variety of assumptions and projections regarding potential future market performance. For example, a 90% confidence level means that, after projecting 1,000 scenarios using varying returns for stocks and bonds, 900 of the hypothetical portfolios were left with money at the end of the designated time period—anywhere from one cent to an amount more than the portfolio started with.

Here are some additional items to keep in mind: 

  • If you are regularly spending above the rate indicated by the 75% confidence level (as shown in the first table), we suggest spending less.
  • If you’re subject to required minimum distributions consider those as part of your withdrawal amount.
  • Be sure to factor Social Security, a pension, annuity income, or other non-portfolio income, in determining your annual spending. This analysis estimates the amount you can withdraw from your investable portfolio based on your time horizon and desired confidence, not total spending using all sources of income. For example, if you need $50,000 annually but receive $10,000 from Social Security, you don’t need to withdraw the whole $50,000 from your portfolio—just the $40,000 difference.
  • Rather than just interest and dividends, a balanced portfolio should also generate capital gains. We suggest all sources of portfolio income to support spending. Investing primarily for interest and dividends may inadvertently skew your portfolio away from your desired asset allocation, and may not deliver the combination of stability and growth required to help your portfolio last. 
  • The projections above and spending rates are before asset management fees, if any, or taxes. Pay those from the gross amount after taking withdrawals.

Stay flexible—nothing ever goes exactly as planned

Our analysis—as well as the original 4% rule—assumes that you increase your spending amount by the rate of inflation each year regardless of market performance. However, life isn’t so predictable. Remember, stay flexible, and evaluate your plan annually or if significant life events occur. If the market performs poorly, you may not be comfortable increasing your spending at all. If the market does well, you may be more inclined to spend more on some “nice to haves.”

Bottom line

The transition from saving to spending from your portfolio can be difficult. There will never be a single “right” answer to how much you can spend from your portfolio in retirement. What’s important is to have a plan and a general guideline for spending—and then adjust as necessary. The goal, after all, isn’t to worry about complicated calculations about spending. It’s to enjoy your retirement.

WallStreetBets vs Hedgefunds – $GME – $AMC and the end of free markets?

The 4 Keys You Need To Know Before Buying A Stock

The Beginner Trader

4 Keys You Need To Know Before Buying A Stock

A lot of information goes into deciding whether or not to take a position in a stock. Traders may use volume bar, moving averages, chart patterns, news, and any number of other indicators available to use on most charts.We won’t get into all that in this post as a lot of that depends on your strategy. 

What I will cover in this post is the 4 things to remember, regardless of strategy when trading a stock. 

  1. Set reward/risk ratio in your head
  2. Finding an entry price
  3. Finding your profit target
  4. Knowing your stop loss

1: Reward/Risk Ratio

In my short experience as a trader I have stuck with a reward/risk ratio of 2:1. What does that mean? Simply put, when I enter a trade I figure out what my target profit is, let’s say it’s $1/share. If that is the case, then my risk should be 0.50 cents/share.

I am risking 50 cents to make 1 dollar. Why? Believe it or not, if you have a 2:1 reward to risk ratio, you only need to be correct on 33% of your trades in order to be profitable. Think about that for second. You can make 3 trades, and be stopped out (sell at your loss point) on two of them, and still walk away profitable. 

Many new traders or folks who have apprehension about trading think that they need to be geniuses and make the right decision most of the time to make money. That adds stress and pressure for some, and it may even stop them from invessting at all. Would you feel better knowing you only needed to be right 33% of the time?

See the chart below to see what I mean. 

Break Even Chart

Let’s break down what we are seeing in this image. The green bar is telling us that if we are correct on 66% of our picks, we break even, even if we lose twice as much as we make on trades. Not ideal, and starting out you likely won’t be hitting on 66% of picks anyway. 

The blue bar is telling is that we will break even if our winning trades make as much money, as our losing trade lose money. If your risk:reward is 1:1, then you have to be right half the time. 

Now, the orange bar is telling us that if we manage our reward to risk ratio to be 2:1, we only need to be correct 33% of the time to break even. 

In a perfect world you hit on 50-70% of your stock picks and stay close to that 2:1 ratio, thus almost ensuring you are profitable. 

So how do we ensure we are using the ratio correctly? As you learn more, and start to become comfortable with predicting possible price targets, you can start to set where you will sell if a stock goes up, and where you will bail if a stock goes down. If you determine that there is a good chance stock XYZ is going to go up $2 a share, and you think it’s worth jumping on now, then in your head (or by setting alerts) you need to know to sell if the stock drops $1 from where you entered. This happens more than you think, and when you bring in the psychology of trading, you won’t believe how hard it is to actually sell at a loss. Most people just say – “Well, I lost money already. Let’s just hang on to see if it turns around.” – and in some cases it might. In others though, the stock will continue to drop, and a 5% loss turns into a 20%, 30%, 40% loss, and then you will really regret not staying disciplined. Trust me…I know from experience. If I am being 100% honest I have 1 stock right now that I should have sold weeks ago, but got into that “It might come back” mentality, and now I am stubbornly waiting for a turn around. *sigh* so dumb. 

Likewise, you would set an alert if the stock gets close to your $2 profit target. If you get to your target and you think the stock still looks strong, you may consider letting it ride longer, or selling half your position. Take some profits, and let the rest continue to rise. If you do that then you can move your stop loss up to the original price you bought in at, and even if it does drop all the way back to where you bought it, that remaining half of the trade would break even. If that was confusing, read it again. 

2-4. Finding An Entry Price / Price Targets / Stop Losses

Let’s say you do some research and scan for stocks that fit your criteria. You see a few that match what you’re looking for, and just jump in, right? Probably not. What will most likely happen is you find stocks that fit your criteria, then you wait for a point of entry. So, how do we do that?

Well, again, that will depend on your strategy and your time frames for holding the stock. In general however you will want to base your entry on a signal or signals you get from your chart analysis. It is important you become familiar with the tools available on charts, and most importantly, finding patterns in the charts. 

Chart patterns when combined with certain indicators will give you the best possible chance of your trade being successful. It’s also important to understand that there is no 100%, full proof, silver bullet, magic formula, absolute, indicator, pattern, news reports, or earning call that will always make a stock go up when you buy.

The reason certain patterns work most of the time, but not others, is that other traders are looking at the same pattern as you. As a collective group looking for a signal, if you all spot that signal and “buy” at the same time, that will cause the stock price to go up. In other words, it’s a self fulfilling prophecy. Which is a good reason to avoid obscure stocks that no one is looking at with very little volume. If you can master finding even one pattern, and consistently invest using your reward to risk ratio, you will be profitable most of the time (above 50%) which is what we want. 

In future posts I will break down exactly how to come up with a price target based on patterns. Stop losses are simply where you will stop out of the stock if the price drops below a certain price of indicator. We will also cover the difference between stop losses, and trailing stop losses. 

Have a question? Let me know in the comment section below, or on Twitter or Facebook

 

Investing Q&A of the Day: Bull vs. Bears?

Investing Q&A of the Day: Bull vs. Bears?

The Beginner Trader

Bulls vs Bears

Even if you’ve never invested a penny in your life, you have likely heard the term “bullish” being used in regards to not only stocks, but any number of other subjects. For example, you may be bullish about your favorite team’s chances of winning a championship. Meaning, you think the chances are good. Being “bearish” mean the exact opposite. 

If you’ve never heard the term and are unclear about how it applies to the stock market, continue reading for a quick overview. 

Bull Market vs. Bear Market

One of the factors to take into consideration when looking for a trade is determine whether we are currently in a bull or bear market. Simply put, is the stock market going up, or going down. If the stock market is generally trending up for an extended period of time, we may be in a bull market. The exact opposite if true of a bear market.

This could be taken into account as a daily status, “are stocks generally  up, or down today?” to help you decide how much risk is involved in a particular trade. It’s true definition however would be if the stock market is trading above or below its 200 day moving average. 

You can look this up easily using your favorite charting software. If you don’t have charting software you like to use or have not used any before, you can use the free versions at www.StockCharts.com or www.Tradingview.com. 

Chart Bear Market

Bear Market Signal

In these images I will use a very recent, real world example. When Covid 19 began to wreak havoc on the economy we saw the stock market take a dive. Near the end of February 2020, the S&P 500 index closed below it’s 200 day moving average, the red line. This is a confirmation that the stock market is in decline. Further confirmed when the blue line (50 day moving average) also crossed below the 200ma. That is know as a “death cross” and people start to panic, and selling intensifies. You can see that play out in the larger red candle in mid-March. 

You will also hear folks on CNBC and twitter say that a bear market has begun when stocks fall 20% from recent highs. That can also be a signal to proceed with caution.

 

Chart - Bull Market

Bull Market Signal

Two months after the signal of the start of the bear market, we got the opposite signal. The first candle to reclaim the 200MA happened on April 18, 2020. It did slip slightly below it on the next day, but stocks continued to rise after that. The 50MA then crossed the 200MA in June, and stocks have generally continued in an uptrend since. 

Why does it matter to us?

If we are in a bear market that doesn’t mean we can’t buy stocks. In fact, just the opposite may be true. It may be a good time to find value stocks, or in the case of Covid, look for stocks that are likely to have a turn around once we find a vaccine. It does mean however, that we have to be cautious. Maybe be more patient, wait for opportunities, and try to scale in to a position rather than dump all your money into a stock at once. Bear markets can also be great for people that are comfortable with shorting stocks. Shorting stocks isn’t for everyone, or the faint of heart as they can be much more risky than just going long on a stock. That is a lesson for another day though. 

A saying you will hear a lot when it comes to investing will be “Bulls make money. Bears make money. Pigs get slaughtered.” Don’t be a pig. In other words, you can make money no matter which direction the stock market is going, but only if you know what you’re doing. Understanding the direction of the market is often the first step in entering a trade, but not the only one. 

Have anything to add to the discussion? Follow me on Twitter, @cchapeton, or find my Facebook page.

How To Start Investing: Scanning For Stocks

How To Start Investing: Scanning For Stocks

The Beginner Trader

How to find stocks

Regardless of the trading or investing strategy you decide to follow, both will need one key, and that is finding the stocks that meet your criteria. To find stocks you are looking for, you will need to use a stock scanner, or maybe more than one scanner to narrow your focus. 

Why do I need a scanner?

There are roughly 2800 companies listes on the New York Stock Exchange (NYSE). Plus the 30 Dow Jones companies, and the hundreds of companies listed on the American Stock Exchange (AMEX) – It would be impossible for you to sift through all those companies in any sort of timely manner to find good trading opportunities. 

Every trading stategy will have its own set of criteria to help you define what it is you’re looking for. For example, you may be looking for stocks that have gapped up, or gapped down. You may be looking for stocks that have just closed above their 200ma, or whose 50ma just crossed the 200ma in one direction or another. You may be looking for value stocks, and you need to find out which are trading below book value. There are almost countless ways you can filter stocks to match your criteria, you just need a filter. That’s where scanners come in. 

Below are some free scanners that you can use anytime. Most have paid version which give you access to additional filters. In some cases you may be able to combine the filters of one scanner with another to fill in the gaps the other is missing (or charging for). I use the free versions of these services as I also have access to my brokerages own scanning tools, and charts which offer just as many, if not more features. I just like the ease of these websites, so I also use them for my research.

Screen Shot Of Barchart.com

BarChart.com

Barchart.com offers a free screening tool that I use mostly for quick pre-market scans. However, it is much more than just a scanner.  You can use it for free with no account. You can use it free, with an account, which gives you access to watchlists and saving screens among other things. Or you can pay for their premiere version which give you additional filters, and features. 

  1. Stock Market News
  2. Market Performance (overall and by sector)
  3. Screener
  4. Watchlists
  5. Charting Software
  6. ETF, Options, Futures, and Currencies
  7. As of the writing of this post ($29.99/mo) – Discounts if you pay yearly. 
Screenshot of Finviz.com

Finviz.com

Finviz.com offers a lot of the same features as Barchart.com. I do like their screener better and feel it’s easier to navigate and use. Like barchart.com you can use the website for free, without an account. You can create an account to save your screens. Although you can’t create charts without upgrading to the paid version. I like to use Finviz to scan for swing trade opportunities, rocket stocks, and dividend stocks. A cool feature that Finviz has that other websites do not is their heat map (see pic above), which offers a cool visual way to take in how the market is doing on that particular day, broken up by sector.

  1. Stock Market News
  2. Market Performance (overall and by sector)
  3. Screener
  4. Watchlists
  5. Charting Software (paid version)
  6. Futures, FOREX, Crypto
  7. As of the writing of this post ($24.96/mo) – why not $24.95? I don’t know. 

Do you have a favorite scanner?

Do you have a favorite screening tool that I haven’t mentioned? Write in the comment section below and I’ll check it out. It could be a stand alone website, or even your own brokerages scanners, if you have one you like. 

    Investing Q&A of the Day: Bull vs. Bears?

    Investing Q&A of the Day: Float

    The Beginner Trader

    What is a stock’s “float”?

    A stock’s float refers to the amount of outstanding shares that are available for trade (buy/sell). To determine the amount of outstanding shares a company has, you can do a quick search on Yahoo Finance. THIS LINK will take you the Yahoo Finance “Statistics” page for the Coca Cola Company, stock symbol $KO. If you scroll down to the “Share Statistics” you will find the float. I have highlighted for you in the image below. 

     

    Highlighting where to find a stock's float.

    The “floating” stock is calculated by subtracting closely-held shares (insiders, major shareholders, employees) and restricted stock that may arise from an IPO.

    Why does float matter?

    Depending on your trading strategy, you will want to narrow your searching by float. In my day trading strategy I look for companies with less than 30-50 million shares. While that sounds like a lot of shares, that would be considered a low float stock. You can see in the example above that $KO has almost 4 billion shares of float, which is very high.

    In my day trading strategy I am looking for stocks that are moving quickly in one direction or another. A stock with less shares will be more volatile than a stock with lots of shares. This is simply due to the dynamic of supply and demand. If a low share, low cost stock has good news in the morning, lots of traders will pour into that stock, and since there isn’t as many outstanding shares, the price of the stock will fluctuate wildy in the first hour of the morning. Riding that volatility is where you can make (or lose) money in a short amount of time. 

    If you’re looking at a stock as more of a long term investment, float may not matter as much in your calculations. You would be looking at other fundamentals like ROIC, PE Ratios, ROA, etc. 

    To learn more about stocks and investing be sure to follow me on twitter @cchapeton.