What do I mean by this? The price of individual stocks can be manipulated by the money-makers on Wall Street. The price is usually bid up by the underwriting brokerage house, (Jim Cramer's rule #23 for investing.....Never underestimate the promotion machine because analysts get behind stocks and can keep them propelled in an up direction well beyond reason...) the company comes out with stellar forecasts (not results), as the price rises the HERD which is you and me (yes, we are all card-carrying, dues paying members), come in and start buying up the stock only to see it begin to fall as the behind the scenes money pulls out leaving the rest of us with losses. This does not happen with every stock but it does happen with many stocks and we, the HERD, have no way of knowing. We are just not privy to this kind of information. Have you ever bought a nicely rising stock, only to see it collapse shortly after you buy it? Welcome to the club!
Not yet a believer that the price of stocks are manipulated by Wall Street? View the video below about one type of scheme used to bid up the price of stocks.
Maybe more important is the fact that the movement of an individual stock is predicated on external factors. I have read in more than one source that seventy percent of individual stocks movement is based on the movement of the indexes. So, even if your stock is not being manipulated and it has wonderful fundamentals, chances are if the overall market is going down, so is your stock. Has that ever happened to you? Twenty percent of a stock's movement is based on the movement of the sector that it is in (banking, transportation, health care, etc.). So again, even with great fundamentals and no manipulation if the sector is not doing well, there is a better than fair chance your individual stock will not do well.
Lastly, ten percent of a stock's movement is predicated on its fundamentals and I already told you what can happen there. Remember Enron, Tyco, etc.? The indexes are so large that they cannot be manipulated by the Wall Street money-makers; the only one who can manipulate the indexes is the Feds. The size of the index is also important for one other reason-liquidity. If you hold sizeable positions in the market you can run into trouble if you have to suddenly sell them. If an individual stock is not liquid enough you may not be able to sell your position and you will incur further losses.
Predicting the movement of the market is difficult enough but with Exchange Traded Funds at least many of the negative factors are removed. Yahoo offers a great section on Exchange Traded Funds. In general, Exchange Traded Funds offer the diversification of mutual funds with the ease of trading like individual stocks.
The proxy for the Nasdaq in the ETF's is the QQQQ also known as the Powershares QQQ Trust. Below is a comparison of the QQQQ to the Nasdaq. You will see that they run very parallel.
