Investing In The Stock Market

There is no question that trading in the stock market can furnish incredible returns for the patient investor. Sure, there are day traders that are able to turn some excellent profits in a short period of time, but that is not a practical goal or expectation for the average investor. Instead, there needs to be a balanced and well thought out plan for retail investors to use that can conserve their capital while giving them a thrill that fast returns can provide. One excellent way that average investors can see high returns, is by trading penny stocks.

Trading and investing with penny stocks carry many pros and cons. The risk associated with trading penny stocks is very high. If an investor thinks that he or she can blindly pick a company, buy a bulk of shares and watch them ride off into the sunset, they are mistaken. More often than not, a stock’s value falls below a dollar for a good reason, generally due to the company’s fundamentals failing pretty badly. Penny stocks are some of the most volatile on the market, often moving 10% or more in a day in either direction. While these stocks look cheap, think of what happens when a stock valued at $.50 falls to $.40, that’s a 20% drop. That would be similar to a $50 stock falling to $40, clearly not a positive move. Penny stocks can just as easily fall to zero as they can double or triple. The pros of penny stocks, is that when they do rise, they rise exponentially, often providing returns you would otherwise never see.

The only way that such a stock could be lifted back up is by a company turnaround, or a buyout. The odds are that the company will go under more often than regain its prominence. This is where research will help you choose the right company to invest in. Did this company become a penny stock because the CEO was ruining the company? Look for new management with a good record of success at previous companies. Did the stock fall because their product was not selling? Look for new product lines that fill a need that other companies have not met yet. Did the company fail, but the product is still strong? Look for a potential reason for the company to be bought out by a larger company interested in their product.

There are several reasons why a penny stock can rise; you need to watch closely at every move the company makes to see where your buying opportunity is. Biotech and pharmaceutical penny stocks are more difficult to predict than the run of the mill penny stock, so there is more research needed on the part of the investor. One of the best things to look for in this type of penny stock would be test drugs. What kind of drugs is the company testing? Is there any competition in the market for this drug? If there is not, then a positive test result can catapult the company’s stock higher.

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When you have decided upon a stock, you need to look for a broker to purchase your shares through. Most brokers charge a commission in the range of $10 for one order. These brokers often include additional commissions on stocks that are valued at less than $2, often coming to an additional 1/10 of a cent, which does not sound like much, but it does add up. Also important to consider is that your commission can significantly cut into your profit. If you spend $100 on your shares, and have to pay $10 commission, you are already 10% down on your trade, and you need to sell at some point for another $10. Buying larger quantities of shares can help you cut that percentage down, but don’t risk too much of your money either, do whatever you feel comfortable with, be balanced.

Penny stocks carry the potential for some excellent gains, or some significant losses. Knowing that you may well lose much of your investment when buying penny stocks can help you to cope if you are wrong on your choice. On the other hand, the possible profit will keep you excited to check your investment over the course of time. It may be advantageous to buy more shares later on, if you see the stock fall further and have confidence it will still rise. Patience is the key, and be balanced about keeping risk to a minimum in your portfolio.

Ah, yes, the good old stock trading system.  Picture this:  you sit down at your computer.  You fire up a program, hit the “refresh” button.  You go make yourself some coffee while the computer fetches the latest stock market data and crunches some numbers.  You return to your screen with some piping hot coffee in your hand.  Scrolling through the list of stocks, you see some “buy,” “sell,” and “hold” indicators next to each.  Based on this information, you make a few trades. The whole process takes you an hour or so in the morning.  After a year of this, you have enough money to retire to a private island.  Thanks to your special stock market software, work is a thing of the past for you.

Sound nice?  This kind of lifestyle is the promise of those selling stock trading systems.  According to these people, by analyzing stock market data according to their proprietary system, you can predict the direction of the stock market and make a fortune while working only a few hours a day.  Quite a nice gig, if you can get it.

photo credit: trader_john

The problem with this is that it is complete bullshit.  That’s right, none of these stock trading methods work.  It might be a sad thought, but the short story is that you should stop listening to those glistening sales pages, and think through the facts a bit.  Let’s consider what you are being offered.  These people have discovered a system that makes vast amounts of money for very little effort.  Rather than hoard the system for themselves and enjoy living a tropical island lifestyle, they are instead going out of their way to sell the system to people like you for a relatively small fee.

When you think about this, it doesn’t really make much sense.  If the system works, why give it away?  They would be much better off keeping things a secret, since any “system” that might actually exist will quickly stop working once people know how to exploit it.

Aside from this issue, I have to question whether such systems exist at all.  Since the stock market is based on the current status of companies and the emotions of investors, it doesn’t really make sense that looking into past pricing and volume information would leave any insights into the future of the market.  Looking for these patterns in the stock market charts is the equivalent of a fortune teller looking for the future in a pile of tea leaves:  she might get it right occasionally, but it really isn’t something to base the rest of your life off of.  The same goes for these types of stock market systems.

Of course, I’m always willing to be proven wrong on this one.  If anyone wants to show me how they have made consistent, long term money using some sort of a stock trading system, I would be happy to look into it.  For the moment, though, I think I will keep investing my money in normal, boring stock market strategies.

Penny stocks are a very popular form of investment for many people.  The high percentage change experienced by penny stocks makes them attractive to traders looking to make high returns.  As defined by the SEC, penny stocks are those that trade for less than $5 per share.  Now, others may use other cut offs, but that is the official definition.  As you might expect, these penny stocks belong to very small companies, and trade in very small volumes.  Often times, this low volume leads to a lack of liquidity, which basically means you can’t buy and sell these stocks when you want to, or at least not at the price you might like.  The small trading volume also makes penny stocks prone to manipulation by unscrupulous individuals.  Despite all of the caveats, though, people still do make money with penny stocks.

If you’re looking to start investing with penny stocks, you will need to find a broker.  This might seem easy, but not all brokers are good for buying penny stocks.  The reason for this is that many brokers will impose high fees for trading penny stocks.  Since one of the keys to investing is to keep fees as low as possible, you will want to find a broker that does not have any fees for penny stocks.  This is easier said than done, but is important if you want to save money on your trades.

If you have a broker that doesn’t charge fees, than buying penny stocks is just like buying any other sort of stock.  Just be careful, the world of penny stocks in unforgiving for those who think they have things all figured out.  Take your time, do your research, and don’t get greedy.  Fail to do this, and you will lose money.

To the outsider, the stock market appears a bit strange and mysterious.  Traders scream at each other on the floor, fortunes are made and lost.  It all seems a bit confusing and mysterious for us mere mortals.  However, when you break it down, the reality of the stock market isn’t that hard to understand.  Let’s break it down into some basics.

First of all, what are stocks?  Simply put, stocks represent a fractional ownership of a company.  When a company decides to “go public,” they are basically selling you a small piece of the company in order to raise funds.  It is because of this that stocks are also called “equities.”  These differ from debt type investments such as bonds, where the company is simply borrowing money at a given interest rate rather than handing out pieces of the company.

photo credit: BlatantNews.com

These stocks are traded on an exchange.  Two major US stock exchanges or the New York Stock Exchange (NYSE) and the NASDAQ.  The NYSE is the one you see on TV with all the traders, the true “Wall Street.”  The NASDAQ is an electronic exchange.  However, they both have one thing in common, as they are the marketplace where stocks are bought and sold.  These transactions take place in large chunks, with different traders (in the NYSE) responsible for  buying and selling different stocks.  The actual process is beyond the scope of this article, and that’s OK since you will never deal directly with the process.

Instead, you will buy and sell stocks through a middle man known as a broker.  The broker passes your buy and sell orders to the market place, where they are executed.  A broker makes money by means of a small fee known as a commission.  You must buy and sell stocks through some sort of a broker, since individual investors cannot place stock market orders on the exchange.  A broker may also give investment advice, but this is not always the case.

So, that covers some stock market basics.  The tells you nothing about actually investing in the stock market, but that’s for another article (which I have many of on this site).  However, knowing some of the basics of what is actually going on in the market is certainly useful before you start investing in earnest.