FAANG Stocks (Meaning, Risks) | How Do FAANGs Affect Indices?

Equity Research Tutorials

What are FAANG Stocks?

When we talk about stocks, what comes to our mind is – stock markets, companies trading into these, ups and downs of indices and risks and returns.

When you hear the term “FAANG stocks”, what comes to your mind?

So, FAANGs are nothing but stocks listed in the New York Stock Exchange for the companies –

Facebook, Amazon, Apple, Netflix, and Google

These companies were normally trading until mid-2017 when people started recognizing the drastic movements in the markets and indices. They found that these companies are huge enough; and as they constitute the major composition of the NYSE, that the Wall Street and CNBC grouped them together, and started calling them – the FAANG stocks. They make up around 12.0% of the S&P 500 Index.

Some Facts about the FAANG Stocks

Tickers for these companies on the NASDAQ and their current prices trending are:

*Market Prices of Stocks as on Oct 2, 2018 4:00 PM (source: Yahoo Finance)
**Market capitalization in $ Bil(s) for the FY 2017 (source: Yahoo Finance)
***Data as on Oct 2, 2018 4:00 PM (source: Yahoo Finance)

Thus, it is seen that of the total volume of 2,297,504,561 (2.3 billion) reported by the nasdaqtrader.com as on Oct 1, 2018, total volumes traded for the FAANG stocks is 73,489,363 (72 million). Additionally, the total Market Capitalization for NASDAQ is approximately $30 Tn (reported by nasdaq.com on Jan 2018), while these stocks alone make up $3,531.72 Bn (or $3.5 Tn) as on Oct 2, 2018, which is _~10.0% of the nation’s total market cap.

How FAANG Stocks Affect the Indices?

As seen in the above analysis, FAANG stocks take up a huge chunk of the market cap in the exchanges, which is why movement in such stocks affects the whole index. It can be well understood that although being just a handful of stocks if they hold good market strength, they are a good enough to make or shake the indices. They affect not only their own shareholders but also the entire shareholder strength.

Are FAANG Stocks Risky?

Since they hold a major share in total stock prices, an investor needs to invest quite a good amount to purchase the FAANGs. They are part of the best investments for investors since over a period of time they have evolved very well and paid good returns. However, investing in this portfolio alone seems risky.
All the FAANG companies (Facebook, Amazon, Apple, Netflix, and Google) are a part of the tech industry. Portfolio investments have a basic concept to diversify the risks to gain maximum returns. Thus, investing only into these stocks may bring good returns as these companies grow, but just if there is any major event or slowdown, these stocks can together bring total losses.
Most of the major investment firms and mutual funds have a combination of these stocks and other smaller stocks, which help them to diversify their portfolio. Investing otherwise, each of these stocks requires a good amount of money, hence an investor first needs to arrange to buy such stocks.
If in case these do not give expected returns in future due to any event, the investor would lose quite some wealth of his after these stocks. Hence, it is advisable to diversify their portfolios.
Another important point which should be noted is that since these giants are the best in their fields, they create a monopoly in the market. There is hardly any competition for them, which is why they may rule the market. They may grow really powerful in near future. Investing in these stocks may seem to be a wise decision now, but the future gets insecure.

Some Key Points to Remember While Trading into FAANGs

Investing in the FAANG stocks is nothing wrong; however, one needs to be cautious into their investments. Some points to be noted are as below:

#1 – Diversification of the portfolio is very important:

If the investor deals into individual stocks, it becomes a primary reason for him to hedge his risks related to these stocks. The FAANGs can be giving quite good returns for a while, but the markets are very volatile, and the risky nature cannot be ignored.

#2 – Regular study of the markets to track performances:

The investor should not be under a notion that these stocks will always be paying well. A good investor is a well-informed research analyst, and only by the regular track of movement of stocks and the market, can he expect good returns.

#3 – Be balanced:

This means investing in other industries and markets as well. Investing in FAANGs is like investing in the only tech industry, and diversification is required not only with other stocks of the same industry but also with other industries. With FAANGs, an investor would be sitting on one side of the boat, if there is too much weight on his side, his boat may topple downwards. So, he needs a perfect balance. There are a lot of analytical tools which provide good information about the portfolio’s beta factor for diversification.

Conclusion

Thus, it is seen that grass is not always green on the other side. One can definitely go ahead on the other side towards the greener grass by investing into the FAANGs but needs to keep in mind about the risks it involves. Additionally, only he is not the one who can read these stocks. There are millions of other investors who have the same reading about these FAANG stocks and market sentiments. So, there is a lot of competition, and there are a lot of good players who are well aware of how to make money. Hence, it becomes extremely important to understand the markets well; and not just go by projected growth or returns declared.

FAANG Stocks