Sunday, May 2, 2010

Investing in "Penny Stocks"

There is a lot of people making money in dismal times. I am definately making money and a lot of my friends are. Now there is something that comes to my attention when dealing with trading techniqually that will not produce as much profit with just buy and hold. But if you apply buy and hold, you will make money too, just not as much.

"Penny Stocks" are usually low on cost, but have a high amount of volitility, meaning there is also a high amount of risk that accompanies those stocks. To hedge against the risk, a little bit of reasearch is needed. The profits from successful "penny stock" trading is immense. I would not try this strategy until you have about about 15 thousand dollars in savings due to the risk involved with it. Overall I would say that amount would be safe to hedge against failure.

Okay, suppose you buy 1000 shares of Citibank at $4.37 (Friday's going rate) and decided to "play the market" so to speak. The stock happens to jump up fifty cents the next day. Congrats, you just made $500! If you do buy and hold and wait for it to go back up to $10, you would make $6,000, but it would be more profitable to play upon the fluctuations of the market by analyzing the pips and the points at which the stock could go up. Keep in mind, this is techniqually day trading, but you would be able to take that amount build upon it. Let's say the penny stock kept going up and down between $4 and $6: that could seriously be some mega cash flow! You go from 0-$2000 net profit per trade! And the beauty is when the stock is "down" you can simply revert to a buy and hold strategy and buffer the time of money loss. Penny stocks are not usually dividend stocks and should not be treated as such. For Dividend bearing stocks, you need a buy and hold strategy. For growth stocks, you need to have a hybrid strategy depending on the stock, but for "penny stocks" you have to know when to enter and exit and it takes a little bit of market watching.

Due to the multiplier effect, you can come out of this investment strategy as a raging bull in a bear economy so keep this in mind when you deal with penny trading. I know at least three stock brokers that are penny trader, but I personally like buy and holding some of my assets although penny trading is something I will probably do more heavily (for certain stocks) in the future. If you like taking a little more risk than me, then this is probably the beginning investment strategy I reccommend, but definately have money saved up to weather potential losses.