This is just something i was wondering about, but here goes anyway. If a trader was dealing with single stocks( not futures ), are there any stocks that mirror the index they are in, maybe not exactly but to a degree where if there was a significant change in the futures price then it would probably direct the actual stock in the same general direction. I know that there are a lot of other factors involved in single stock trading but i would be interested to see if this was a viable part of any strategy. This may be 'old hat', but i'm asking the question as a matter of interest and not for arguments sake. PeeDee.
Don't answer that, i don't know, but in reality it seems you have to trade cash stocks to be able to benefit from any market movement or percieved movement because futures don't rule cash markets, it's what people think about the cash market that rules the futures market that counts?...I don't know!
Peedee - Your'e right. Cash is King!
Having said that, both can get out of sync with eachother creating arb opportunities - but thats for the institutions only (in most cases)
Quote:
are there any stocks that mirror the index they are in, maybe not exactly but to a degree where if there was a significant change in the futures price then it would probably direct the actual stock in the same general direction.
I don't know if this answers your question, but generally, the larger cap stocks will act more in tune with the index. Remember, the index is a derivative of the largest cap stocks. E.g., MSFT, INTC, ORCL, CSCO, QCOM together used to make up about 20% of the NASDAQ weighting. Is this what you mean???
Having said that, both can get out of sync with eachother creating arb opportunities - but thats for the institutions only (in most cases)
Quote:
are there any stocks that mirror the index they are in, maybe not exactly but to a degree where if there was a significant change in the futures price then it would probably direct the actual stock in the same general direction.
I don't know if this answers your question, but generally, the larger cap stocks will act more in tune with the index. Remember, the index is a derivative of the largest cap stocks. E.g., MSFT, INTC, ORCL, CSCO, QCOM together used to make up about 20% of the NASDAQ weighting. Is this what you mean???
Airthrey Capital
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Peedee,
If you want to replicate the movements of a stock index by using a single stock, you will need to know what the "beta" of an individual stock is. The beta is basically how senistive the stocks movement is compared to the index. A beta of 1 will mean it will move precisiely in correlation to the index.
BBB is correct in stating that you are more likely to find this in a large cap stock which is a constituent of a capital weighted index (such as the FTSE).
If you identify a stock with a beta of o.5, you will need to invest twice as much in that stock than you would to get the same outcome from investing in the stock index. E,g invest £20,000 in the stock would give you the same outcome of investing £10,000 in the index.
The beta of a stock continually changes, and so this ratio may need regular adjustment.
Most of the above is the theory, but is difficult to replicate in practice.
Remember too that you face specific stock risk.
I know of a very well known spread betting company (the original pioneers) who would hedge their positions using the appropraite ratios of Glaxo, BP, or Shell...That was years ago, of course!
If you want to replicate the movements of a stock index by using a single stock, you will need to know what the "beta" of an individual stock is. The beta is basically how senistive the stocks movement is compared to the index. A beta of 1 will mean it will move precisiely in correlation to the index.
BBB is correct in stating that you are more likely to find this in a large cap stock which is a constituent of a capital weighted index (such as the FTSE).
If you identify a stock with a beta of o.5, you will need to invest twice as much in that stock than you would to get the same outcome from investing in the stock index. E,g invest £20,000 in the stock would give you the same outcome of investing £10,000 in the index.
The beta of a stock continually changes, and so this ratio may need regular adjustment.
Most of the above is the theory, but is difficult to replicate in practice.
Remember too that you face specific stock risk.
I know of a very well known spread betting company (the original pioneers) who would hedge their positions using the appropraite ratios of Glaxo, BP, or Shell...That was years ago, of course!
That's what i was trying to ask in the original thread, actual single company stocks that mirror the index they are in( i should have made that clearer! ), saying that, ETF's seem like a good instrument to trade. To all of the above posters i'd be interested in what kind of percentage/ratio trading stocks to say futures or options you all have, in other words have you got any preferences to any of them, stocks seem safer but don't have the leverage of futures which are more risky. You may have read my thread, but at the moment i'm going from SB to IB, i made a 'token' trade on IB earlier on, it was QQQ one thing i noticed was that for every cent gained or lossed my open position gained a dollar up or down i thought the position would have moved percentage wise i.e. Nas100 moves 1.5%, my postion moves 1.5%. Does anybody know why this happens? Cheers, PeeDee.
