Penny Stock Trading
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.
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.
Tags: biotech, commissions, penny stocks