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.

photo credit: pfala

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.

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.

On this site, I often write about the virtues of investing in the market with index funds.  This is a good strategy, and is what I practice myself.  However, there is also something to be said for the purchase of individual stocks.  When we think of the world’s greatest investors, we are thinking of those who have made wise decisions in purchasing individual stocks.  Warren Buffet immediately comes to mind, as do a slew of others.

Of course, the real challenge when it comes to purchasing stocks is determining the best stocks to buy.   As you might imagine, I don’t have any simple answers for you here.  At best, I can give you some general strategies that work for a lot of people, and you can do your own research and see what works best for you.  I make no claims as to the general effectiveness of these methods, so use at your own risk.  With out of the way, here are some popular stock selection strategies.

photo credit: quinn.anya

Value Investing

Value investing could well be called the “school of Warren Buffet,” though it was actually originally outlined by Buffet’s mentor, Benjamin Graham.  In his book, Security Analysis, Graham lays out the classic rules of stock picking based on value.  In this school of thought, investors are trying to beat the market by selecting stocks that are undervalued at their current market price.  This is determined by a careful analysis of the company’s balance sheet, with estimates made of the future earning potential.  If the company’s future earnings potential is more than the stock price would indicate, the stock is considered a good value.  A simpler form of this approach is to buy stocks with a low price to earnings ratio (P/E ratio).

Growth Investing

In this school of investing, the best stocks are those that have the best growth potential.  Stocks are picked on companies that appear to be ready to grow greatly in the future, as determined by the investors research.  These types of stocks will rarely pay out dividends, as they are investing every cent back into growing the company as fast as possible.  Many investors do well with this investing style.

Penny Stock Investing

This is not a strategy pursued by most real financial professionals, but is quite popular with many individual investors.  According to this school, penny stocks are the best to buy since they incur great percentage changes when compared to normal stocks.  When a $75 stock moves up by $.50, that’s a small change.  When a $2 stock moves up by the same amount, that is a much bigger gain.  However, stocks can move down as well, and predicting the direction of penny stocks isn’t as easy as some gurus would make it sound.  Still, people do make money investing with this style.

This is just a basic overview of how many people determine the best stocks to purchase.  There is no one right answer, so be sure to keep learning everything you can.  After all, your hard earned cash shouldn’t be put just anywhere.  Form a solid investment plan, stick with it, and reap the results.

Penny stock trading is a popular form of trying to make money with stocks.  Since penny stocks are priced very low, small movement in their prices can lead to great changes in the total value of a position.  For this reason, they are popular with day traders, since volatility is needed to make a good short term profit.

As with any sort of intra-day trading, it is very important to keep costs low.  If you are entering and exiting multiple positions in a short amount of time, it is crucial that you spend no more than necessary on commissions, as you will be shocked at how fast these can all add up.  Keep more of your money to yourself, and select a penny stock broker with the lowest commissions possible.

Another potential issue when it comes to fees is that many brokers will charge a premium for trading stocks under a certain cost per share, or at a certain volume.  Since penny stock trading consists of buying a high volume of very cheap stocks, this can form a problem.  Be sure to find a broker that does not charge a premium for trading penny stocks if at all possible.  You may have to read the fine print to figure this out, but it’s worth it in the long run.  Those small fees will eat into your earnings over time.

photo credit: ♦ Kris ♦

Once you have the fees sorted out, it’s time to consider some other factors.  As with any sort of day trading, speed of execution is critical.  You want your orders to be carried out as soon as possible after you place them.  The best way of figuring out the responsiveness of a given broker is by reading reviews online about how well they execute your orders.  Most of them will advertise good times, but there are no guarantees.  This is one area where doing your homework will pay off well.  You don’t want to be stuck holding a bad position longer than you want to because the broker didn’t execute your order quickly.

So, this covers the very basics of choosing a penny stock broker.  There are other features that help differentiate different brokers, but the ones listed above are by far the most critical.  If you’re going to be trading penny stocks, you can’t afford to ignore these issues and let costs eat up your earnings.  Play it safe, do your homework, and find the right brokerage for you.