Stock Trading 101: How to Find the Most Tradable Stocks

Here's the very first thing anyone should learn in Stock Trading 101.

Though 93% of American companies are not worth your time, you can make a killing with the remaining 7%.

You see, there are about 20,000 stocks trading worldwide. While many of them have potential upside, they aren't necessarily life-changing or market-beating gains.

Money Morning's options trading specialist, Tom Gentile, says that most of these stocks don't have the upside to justify hours of digging through financial reports and stock listings.

Fortunately, we can whittle them down a bit. Just over 6,200 of them trade on U.S. exchanges. Of those, about 3,600 are American companies.

But you can still hone them down more. It takes a mere three steps to find the only stocks worth trading. Here's how to make trading stocks simple.

Stock Trading 101: Choosing the Right Stocks

Tom looks for stocks that check three simple boxes:

  1. Liquidity
  2. Mobility (a.k.a. Volatility)
  3. Optionable

It only takes a few keystrokes and mouse clicks on your computer to find these parameters.

To measure liquidity, we look no further than the options market.

You can go on the CBOE website to find the most active options with the tightest bid-ask spreads. This shows supply and demand by traders and investors alike.

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The higher the volume of options being traded, the better the liquidity. And higher liquidity will allow you to get in and out quickly and efficiently.

The next thing you want to look for is minimum volatility.

Don't let the word "volatility" scare you. Some level of volatility is necessary for profits. Stocks with zero volatility have zero mobility.

You don't want stocks that just sit there, not moving and providing no opportunity for growth.

Of course, too much volatility is not good either. But do make sure that you set a minimum threshold to suit your risk profile. That will help you further narrow down your picks to the best stocks.

Finally, the stocks must be short-term optionable.

Remember, options provide the fastest road to profits. And we want to know if the companies that pass the first two tests have a robust options market for short-term trading.

Stocks with active options also tend to be very active themselves.

When you get to the CBOE website, look for their hybrid penny pilot list. It's a downloadable list of stocks with options bids and asks within a five cent spread.

Or, you can just Google search "penny pilot program." Visit the CBOE from there and look for the link for the "hybrid" penny pilot program. Then click the link to download a CSV spreadsheet file.

What we've done here is reduced the universe of trades down from 20,000 stocks, to 4,000 optionable stocks, to 400 stocks that have good liquidity.

But even that can be a lot to work with. Tom Gentile breaks this down even further by looking only at stocks that have options with weekly expirations.

The point is to put the market's best, fastest-moving stocks on your radar screen. That's the first step in spotting opportunities, creating low-risk trades and then executing them.

Consistency is the key. This, paired with the knowledge, is what separates expert traders.

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