Index vs Individual Stocks

Six charts to compare the S&P500 index vs 6 individual stocks that you may be familiar with (XOM, AAPL, FB, KO, NFLX, SKWS), over the past 12 months.  Do you notice the similarities and differences between the S&P500 Index vs Individual Stocks?

 

 

Here are just 7 of the more basic and fundamental differences:

1. XOM (an individual stock) can keep trending down for 12 months and lose 18%, when the S&P500 can bop up and down to eek out a small 4.27% over the same period.

Conclusion:  Individual stock (even popular names) can trend down longer than you expect.

2. SKWS (an individual stock) can keep trending up for 12 months and gain 114%, S&P500 with its +4.27% appears flat in comparison.

Conclusion:  Individual stock can trend up longer than you expect.

3. NFLX (an individual stock) can fall hugely and rise hugely over a 12 month period compared to S&P500.

Conclusion:  Individual stock (even popular names) can fall and rise a lot more than the S&P500 Index.

4. Discontinuities from Opening Gaps.   Not shown here, but individual stocks are more prone to opening gaps (up or down), and these opening gaps are largely unpredictable in terms of 1. Direction, 2. Quantum, 3. Timing.   Indices tend to have a lot less discontinuities.

5. Earnings, Company Guidance, News, Announcements, Dividends, Stock Splits, Merger & Acquisitions, New Product Launches, Key Management changes, etc. can impact an individual stock price very significantly.  These tend to have a much smaller/negligible impact on the S&P500 index.

6. Higher volatility (greater unpredictability) from individual stocks.  Even the "boring" KO (Coca Cola) stock is more volatile than the S&P500 Index.

7. The S&P500 index is more "choppy" and trends less than individual stocks.  After rising for several days, it tend to pulls back, and after falling for several days, it tends to recover.  Whereas individual stocks can suddenly turn into a strong trend that last longer and goes further than one expects.

Does this mean that trading Indices like S&P500 is "boring" and "low returns" compared to individual stocks?  

No.  Most traders that trades the S&P500 index trades leveraged products, such as Futures, Options and other leveraged products on S&P500.  The best traders like Karen the Super trader who only trades SPX (S&P500) tend to earn more than the best stock traders due to the leverage. 

The key is a positive expectancy trading system, the number of trading opportunities per month, position sizing/Money Management and the individual Trader Psychology.    It is very rarely about "which stock" and "what price" (meaning there can be many different instruments at many different prices that creates a positive and negative expectancy system).