Q.Dear Josh, small cap shares can be very volatile. If I want to trade small caps, is it better to do so within a wider portfolio?
A.First, it is good that you mentioned trading small cap shares as part of a wider portfolio. Having a portfolio can be an important part of maintaining a longer trading lifespan because it distributes your risk across a number of different instruments, rather than putting all your eggs in one basket.
Portfolios can be largely ignored by spread betters as many trades are very short-term. While this may devalue the need for a portfolio somewhat, it does not completely negate it. So if you do want to trade small cap shares, doing so as part of a wider portfolio might be a good idea, particularly because they can be riskier than standard FTSE 100 shares due to volatility.
While volatility in small cap shares can be advantageous, it could also be dangerous if you are caught on the wrong side of a move. The reason why small cap shares are volatile is because they can be very illiquid. This raises another issue: you may have difficulty opening or closing positions if there is not enough volume available at the open or exit price that you desire.
Q. Dear Josh, what’s the biggest economic news item to look out for this week?
A.This week is a massive week for economic data. In my experience, spread betters tend to get excited about the first week of a new month because it is usually filled with lots of market-moving data that could create several trading opportunities.
This week, for example, we have UK and US manufacturing data due out today and tomorrow, while on Thursday the Bank of England and ECB announce their interest rate decisions. However, Friday might be the day that most traders will look out for because US non-farm payrolls and unemployment rates are due out at 1.30pm UK time.
Last week showed just how sensitive the market was to jobs data when equities in both Europe and the US fell after a spike in US jobless claims. The financial markets will be looking at the US jobs data as a key indicator of how the recovery is panning out, and equities and currencies alike could experience volatility.