Since writing about trading penny stocks online over at my blog, I received several emails about the subject and it seems to have generated a good deal of interest.
Much has been written about trading stock online, in particular penny stocks, and by far more qualified people than me.
If the idea of an exciting risky investment strategy appeals to you, trading penny stocks could be the adrenalin fix you are seeking. It’s pretty simple to get started, but success or failure are equally possible results.
Firstly, penny stocks are usually defined as stocks trading at below $5 a share. Some people consider this arbitrary amount differently and would say that $2 would be a better yardstick, but, whatever the definition, these are shares usually traded outside of the major exchanges. They are often volatile and unpredictable and their performance is very difficult to monitor or foresee.
Don’t be lured into buying stocks just because a newsletter or email tells you it is a sure thing. There are plenty of sharks out there who will engange in the practice known as “pump and dump”, whereby they will attempt to generate unsubstatiated hype about a particular stock in the hope that there will be a rush to buy, enabling them to sell on their worthless holdings to unsuspecting hopefuls. You really must excercise caution and do your own “due diligence” – if you don’t, you will soon end up regretting impulsive penny stock purchases.
Trading stock online is not difficult, and once you have a basic understanding of how it works and decide to give it a try, you will need an account with an online stockbroker.
In very simplistic terms you will place orders with your broker via the online trading interface and they will carry out your buying and selling instructions. Each trade you carry out, buying or selling, will cost you a small commission to the broker. With Lowtrades usually around $5.
Presumably your interest in penny stocks means that you are looking to make quick returns. It is true that he rewards can be tremendous – it is entirely possible to make hundreds of dollars in a day. By the same token, get it wrong and the losses can soon mount up too. Day trading is not always profitable, but it’s always risky. Day traders buy stock and aim to sell it on the same day for a profit – the age old buy low, sell high strategy. Of course, if the stock price falls, you have a decision to make – sell it at a loss, or hold on in the hope that prices will recover and you can mitigate your losses.
You have to understand that not every stock you buy will appreciate in value during the course of one trading day. This means you could end up with your risk capital tied up in one company, leaving you unable to make any other trades until you offload the stock. Having all your eggs in one basket is therefore not a great trading strategy.
For those with limited funds to invest, this can present a bit of a dilemma. There is little point buying so few shares that even if the price rockets upward, you will make only a few dollars – you must also remember to deduct brokerage fees from overall profits too. If you are working with only a small amount of capital, you are going to need to find resonably priced stock that allows you to buy a few hundred shares, certainly not less than 100. For example, if you can secure 300 shares and the price rises by 25 cents, you will net yourself only $75 less any commissions – hardly earth shattering. On the other hand if the stock value increases by a dollar, you have $300. The basic math is simple enough, so you need to look carefully at whether an investment is likely to be worthwhile relative to the amount you are able to invest.
It goes without saying that the more investment capital you have, the more you stand to make, or lose.
Opening a trading account is straightforward enough once you know the kind of account that you need. For a simple individual cash account some brokers will require a minimum deposit and others will not. Shop around to find the best deal for your own personal circumstances. Charges will vary too, and these all affect your bottom line, so make sure you know how much each trade is going to cost you.
Finally, I will repeat my earlier advice – never invest anything that you can’t afford to lose. Penny Stocks are a gamble, and if you don’t have the constitution for risking the purchase price, don’t start with online trading of any kind. Sit back and have a good think about what you are planning to do and what you hope to achieve through your investments. If you are thinking of day trading you will need to be in a position to monitor your stocks throughout the trading day – if you are not going to be able to do this, you will not be able to sell when the need arises – i.e if the price should spike briefly.
If you want to start trading penny stocks online, read up on the subject carefully and learn as much as you can. There are plenty of helpful websites such as AllPennyStocks.com where you can begin to learn and I have also included some useful resources below for those wanting to learn more. Never let anyone tell you that it’s as easy as falling off a log though – if it was, we’s all be millionaires by now!