I am asked this question numerous times a week and the simple answer is “Yes.” Traders can feel overwhelmed by the number of equities they have to look through to select an equity to trade. There are thousands of symbols.
Some traders are aware of a classification called Sector (s), meaning groups of equities are categorized to fit under a heading based on the service they offer. Companies related to or in the financial business are listed under the Financial Sector, so banks and investment companies are grouped under that sector.
There are 11 Stock Market Sectors and each holds the various companies that fit within each sector. Financial equities fit into XLF, the Financial Sector. Healthcare companies flow into XLV and Energy is XLE, etc.
Another term for these groups is Exchange Traded Funds (ETF). The 11 sector ETF symbols are: XLK, XLC, XLF, XLE, XLB, XLY, XLI, XLV, XLP, XLRE, XLC
The image below shows the companies that fit within the Sector groups.
Image courtesy of Finviz.com
Okay, so 11 Sectors helps to reduce the number of equities that a trader can focus their attention on but is there an even more concise way to group stocks.
Again, the answer is yes. They can be grouped into what are called Indice Exchange Traded Funds.
ETFs or Exchange Traded Funds based on the Dow, Nasdaq, S&P and Russell have become an extremely effective trading tool. They offer many advantages to a trader and provide accessibility to trading strategies that were difficult to accomplish for individual traders in the past. A key advantage is that they can provide the diversity of an entire group of equities vs trying to pick a single stock.
DIA is the ETF for the Dow. QQQ is the Nasdaq ETF, SPY is S&P, and IWM is the Russell.
The DIA includes 30 Blue-chip Companies
QQQ includes 100 Non-Financial Companies
SPY groups 505 different solid asset Companies
IWM holds 2,000 small-cap Companies’ Stocks
Below is a daily chart for the last 6 months for DIA. Again, it includes 30 top blue-chip equities. Each candle includes the price moves of that group of equities for a day.
Courtesy of Stockcharts.com
The other equities- QQQ, SPY and IWM would produce similar charts and would include the price movements of the equities included within their symbols.
Traders focus on the Indice ETF that they are interested in, watch its chart and then zero in on selecting a trade when a pattern is formed on the indicators for the strategy they are following.
My goal is to teach everyday people how to trade options, to learn to read charts, and while they are learning, they can participte in a program like SMART Paycheck that trades SPY. I think of this as an earn-while-you-learn program that is perfectly suited for people who are interested in learning to trade options as well as have the opportunity to earn a profit as part of the learning process.