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High Priced Stocks

High Priced Stocks
We have received several emails about highpriced stocks such as GOOG and CME.  Why are you mentioning them so much on the message board Many traders seem to have a psychological barrier or misunderstanding about trading stocks above a certain price feeling that they are too expensive. We feel it is important to understand that there is no real difference between trading a $400 stock and a $40 stock. If you would normally trade 1000 shares of a $40 stock then simply buy 100 shares of a $400 stock and it will work out the same. Train yourself to think in terms of percentage moves and you will notice that a nice 10% move in a $40 stock would be a gain of 4 points while the same percentage move in a $400 stock would be 40 points. A 1000 share position in the $40 stock would earn a $4000 profit and a 100 share position in the $400 stock would earn the same $4000 profit. 

50 shares or 500 shares
GOOG will not split their stock so we will use CME as our example. Right now CME trades near $400.  It has a float of 35 million. If it were to split its stock 10 for 1 the float would be 350 million and the price of the stock would be $40.  Buying 50 shares now would cost you $20000.  You could buy $20K worth of a $40 stock and you would have 500 shares.  Either way you have the same amount of money invested whether you own 50 shares or 500 shares.  If the $400 stock moved to $500 that would be a 20% gain and you would have a profit of $5000.  Now going from $400 to $500 seems like a big move but it is no more of a move than a $40 stock going to $50.  That would also be a 20% gain and a $5000 profit. 

The Floaters Float On
I would like to make some additional points about high priced stocks.  There is a song from the 70's called Float On by a group called The Floaters (if you can believe that LOL).  Of course this song has nothing to do with stock trading but it can still remind us of a very important point in trading.  I am talking about the word float as it pertains to the float of a stock.  The lower float stocks move because of supply and demand factors.  The fewer the shares available the hotter the stock will be once it gets on the radar and comes into play.  The big cap stocks mentioned below are so over owned by big institutions that there is nobody buying them now.  The institutions that want to own these stocks already own them.  There is only the buying power of the little guys left to move the stock price up and that is not enough.  The institutions that want to sell these stocks do so at every price spike and that is why the stocks cannot and will not move higher. 

Big Cap Stocks Cap Sized
High priced stocks are high priced for a reason; you have to pay for quality and they have a lot less shares in the float.  YHOO trades near $40 but has 1.42 billion shares outstanding.  Stocks like YHOO have such high floats resulting from splitting their stocks that it takes awhile for the stock to move up $10 (or 20% in this case).  GOOG has 280 million shares almost 5 times fewer shares than YHOO with a growth rate much higher than YHOO.  Stocks with smaller floats move much faster than stocks with large floats.  Hence the slow action in stocks like: CSCO DELL INTC MSFT ORCL SUNW and SIRI.  This is why these stocks are not good trading vehicles; you just cannot get any meaningful movement to profit from them.  I would rather buy fewer shares of a high priced low float stock and get a 5 or 10 point swing from which to trade. Think of it this way: big cap stocks are too heavy and cannot float so they sink under the water.  Low float stocks tend to rise with the tide and stay afloat. 

For those of you who think GOOG is too expensive now let's compare GOOG (the new leader) to YHOO (then old leader).  If YHOO had never split their stock the price of the stock today would be $800.00. Is that too expensive It makes GOOG look cheap here especially considering GOOG is growing much faster than YHOO.  The stocks mentioned above are yesterday's leaders.  The market is now on to the new leaders.  Higher priced low float stocks that will make those 1000% moves up in the next few years and someday be the new over owned bloated pigs that the institutions will dump onto the average investor who is always late to the party. 

GOOG's stock is under owned.  The big money only owns 37% of the float.  This is because it is not in the S&P or Nasdaq 100 yet.  When and if it becomes part of those indexes it will have to be bought by all those mutual funds that have to buy it according to their rules.  Once they have all bought there will be nobody left to buy shares except the retail investor.  This is when it will become over owned and we sell it.  But what will the price of the stock be after all that buying One final point on GOOG there is only 3% of the float shorted.  With such a low percentage it tells me that there are no i

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