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Penny Stock Trading The Risks

admin — Fri, 16 Dec 2011 17:07:42 +0000

Author : John Merritt

Many people chose to buy penny stocks due to the potential profits of picking the right stock and having it pay off big However, knowing the risks of these types of stocks is critical Because if you don't know the risks, chances are you will lose money!

When we talk about penny stocks, it's a good idea to first define what qualifies as a penny stock While most people would probably consider any stock priced under $1 00 to be a penny stock, there are almost as many investors and larger funds that consider any stock priced under $5 00 to be in penny stock territory So for the sake of this discussion, we'll use $5 00 as our cutoff for what we'll refer to as a penny stock With that in mind, here's some factors that can influence (or increase) the risks of penny stocks that you may not find in stocks that trade at higher prices:

1 The stock exchange

Is the stock listed on one of the exchanges? Buying a stock on one of the exchanges is less risky than trading stocks over-the-counter In other words, it's much easier for "sketchy" or questionable companies to get listed through OTC pink sheets than the three major exchanges The NYSE, NASDAQ and AMEX all have tougher requirements in place to get listed, as well as rules for financial reporting and market capitalization, among others Any company that falls out of compliance is booted off the exchange if not brought back into compliance

2 Trading volume

How much trading volume is there each day? If not many shares are traded in the particular stock, this can make buying and selling the stock at a market price very difficult and can increase the risk of losses For example, if you want to sell 100,000 shares of a stock with a last trade of 10 cents but the closest best bid with that many shares is all the way down to 06 cents, you may end up losing 40% if you need to sell the stock right then This is sometimes called "liquidity risk" and although it can be a risk of higher priced stocks as well, it is not as pronounced as in penny stocks

3 Stock price

Why is the stock a penny stock in the first place? The price of the stock itself is important, because many times the reason a stock is trading for such a low price is the company itself may be having financial problems or other issues The company may even be on the verge of bankruptcy Can you be sure the company isn't going to fold the day after you buy the stock? It's a good idea to check recent news and press releases for the company to make sure there's no suprises you aren't aware of

4 Volatility

Is there much historical volatility? And what I mean by this, is if you look at a 1 year chart for the stock does it make big price moves often, either up or down? While volatility can be your friend, it can also be your worst enemy Imagine buying a stock for $1 00 a share, and having it fall to 30 cents in just a few days That's a big loss, especially if you've put a lot of money in one stock

5 News, information and research

Since the bulk of penny stocks tend to be smaller, lesser known companies, it's sometimes hard to find any information about them The company may rarely (if ever) release news about company developments, it's products or general business conditions This makes it very diffuclt to do research or decide if it's a company worth buying stock in And this increases risk

6 Location of the company

Given all these other factors, one additional thing to consider is where is the company located? Since the US, Canada and the UK tend to have more securities laws and regulation in place to discourage fraud, corruption and other unethical business practices, other countries may not, or if they do they may be loosely enforced Buying stock in a small, unknown company in the US may be risky enough, but buying stock in a small, unknown company in Russia or some other country that may not be subject to the business or securities laws of your country can increase the risks exponentially And just to be clear here I am not picking on Russia, I love Russia and I love Russians, they are some of the smartest business people out there - I only use this as an example to make a point

What do I think?

Overall I think penny stocks carry higher than average risk, so I would not invest a lot of money in these types of stocks However, if you are a person who is interested in penny stocks and think the risk is worth the potential big gains, just be sure you fully understand the risks and take steps to mitigate them as much as possible Good luck!

John Merritt is an active investor and founder of invest.us, which offers resources for investing in America. Visit us for more investing basics, or link to this article on penny stock trading.

Reducing Risk with Options Trading

admin — Mon, 31 Oct 2011 01:38:05 +0000

Author : Nick Messe

Options trading has been around since 1973 but really didn't take off until the last 10 years or so During that period the number of options contracts traded on U S exchanges increased by more than 600% What accounts for this increase in the popularity of options trading?

One major factor is that options are now understood better than they previously were Because options have many variations it is quite easy to misunderstand how they work, and as a result many investors - or their brokers - had bad experiences when they first tried them

The influence of the internet has also been a significant factor Not only has the internet provided the means for low cost options trading, but it has been a tremendous source of valuable information

This has served to demystify the options trading process to a great degree Prospective options traders can draw on the experience and advice of countless numbers of people who have successfully engaged in trading, learned its ins and outs, and developed a sophisticated understanding of the activity

One commonly held view about options trading is that it is risky - mostly because it is relatively difficult to understand and the new investor will usually be uncertain about the best strategy to employ

One of the simplest strategies to understand, and one that can actually be used to reduce risk is the use of a put option as a hedge against dramatic declines in a stock's market value

The traditional way stock traders protect themselves against such losses is to place a "stop-loss order" on a particular stock they hold When it trades at or below the limit specified in the stop-loss order, the stop-loss order automatically becomes a market order to sell

This procedure has some serious shortcomings When a stock starts fluctuating in price a stop-loss order virtually guarantees that it will be sold for a loss because it will be sold as soon as it dips to or below the stop order price

More importantly when a stock worth, say, $50 at closing opens in the morning at $30 it will automatically be sold at that price This serves to lock in some pretty significant losses

Purchasing a put option, on the other hand, lets you purchase the right to sell a specific stock at a predetermined price (the "strike price") for a specified period of time So if you suspect a certain stock is going to decline in value you can purchase a put option for a quantity of that stock If its market price goes below the predetermined strike price you have the option of selling it at the strike price

For example, let's say XYZ stock is trading at $50 today, but you suspect it might go down quite a bit in value over the next two or three months You might purchase a put option for 200 shares of XYZ stock at a strike price of $42 for a period of three months

What this means is that you can sell 200 shares of XYZ at $42 per share any time within that time period - even if the market price of the stock should go to $30 In other words you are paying a price to lock in a guaranteed value for a limited period of time

This contract would cost you a "premium" - say it is $3 per share If the stock price does not go down during the period of your contract you can simply let the option expire and forfeit your premium Of if it does go down you can sell your stock if you actually own some and take less of a loss than you otherwise would have

Or even better, if you don't actually own any of the stock you could buy some at the current price and sell it at the strike price predetermined in your option contract

The bottom line is that options trading can be fairly simple like this example and can be used to reduce risk rather than increase it On the other hand, some strategies used by options traders are very complicated and carry considerable risk

Anyone considering getting involved in options trading should take it one step at a time Find a good online trading site that specializes in options trading and has low fees Then learn as much as you possibly can about options trading strategies before you try anything too adventurous

Join more than 130,000 other satisfied traders by opening an account with TradeKing.com, where options trading online is our specialty.

How to Make Money Online Trade Forex to Grow Rich

admin — Sat, 25 Sep 2010 12:12:46 +0000

Author : Daniel Su

Trade the forex market or currency market can be a highly profitable experience Learning to trade forex right is the first step to gain possible riches on what could be an enriching journey To do that, you'll need to know these 2 factors of how a forex trading system can bring success to you and how it should be done

1 Network With Forex Traders - Although forex trading may seems like a one man show, but in truth, you may need some reliable forex friends or partners to talk about the market conditions It will be good that if you and your partners share the same forex trading system and talk about the same forex strategy

This means that everyone is using the same system and can remind each other of their trades Imagine if you are trading using the system yourself and no one is using it You met with difficulties, unable to understand why does it happen this way, losses pile up and then eventually you give up on yourself But if you have partners who can trade together using same set of forex trading strategies, then you can encourage each other in times of difficulty and help each other out

Therefore, it will be good that among all of you who are using the same forex trading system, one or 2 of you are really good in it and when some weak or inexperienced traders encounter problems, you can solve it easily

2 Creating Your Own Forex Trading System - For newbies in forex trading, it's understandable and acceptable that most of them are always looking around for forex tips, new methods, new trading systems or strategies to help them to profit in the forex market

We do not try to penalize them because they are new and do not really know how the market actually works That is why I setup a blog on forex trading, giving people the right education so that they can trade correctly and profitably

If you have been trader for months or years, but still cannot make a consistent income from the market, you really have to reevaluate on your actions Is it you are trading the wrong way, too impatient or what?

What I suggest to many traders is that once you can profit using the forex trading system that you got it from somewhere, but still not really that comfortable with the trading timeframe or style, then it's time you consider creating your own system by modifying others' systems

In other words, try to integrate your knowledge with the current resources to make the system suit your lifestyle This is important because the trading system follows you the rest of your trading career and you want it to be at your finger tips

It may seem like it's a mountain to climb when you just started trading, but when confidence starts kicking in, patience and emotions starts to be in control and some experience has built in you, then you may be soon over the steep learning curve and begin a new life of trading

To learn how to make money online, click here to download my FREE 56-page ebook Forex Trading To Riches.
The author, Daniel Su, is the founder of ForexTradingPower.com where you can get free premium forex trading tips and resources.

Practicing in the Forex Market

admin — Sat, 15 May 2010 00:34:00 +0000

So you want to learn about the Forex market, and trading internationally but you are risking your personal wealth if you jump in before knowing all about how trading takes place. Online, you will find many games and simulations while learning the methods involved in forex market trading. The forex markets include countries from around the world, where all countries involved are using different currencies, and when faced against each other are worth more or less than the original valued currencies that are being traded. The forex markets are used to build wealth in, for governments, banks, and brokers, and for many countries.

To get started in learning about forex trading, you will need to locate the forex trading software, education-learning system you want to use. As you find the games, as they are called, you will enter information about yourself, about what you are interested in learning and then you will download software to your computer. In following the ‘game’, you will learn how to make and lose money in the forex market. This type of game is going to make you more aware of what happens daily, how the markets open and close, and how different the various countries currencies really are.

You will open an online ‘account’ using the gaming system. You will then be able to read the news, find and compare markets, and you will be able to make ‘fake’ trades so you can watch your money build or be eaten away in losses. As you learn the system, using it a few times a week, you are going to be more prepared, more educated and you will be ready to use the forex trades to make money. Of course, you may still need the aid of broker or a company to make your transactions happen but you will better understand the process, what will happen, and what calls you may want to make when you read about the news, the markets, and the currencies in other countries.

The forex market is also referred to as the FX market. If you are interested in joining the millions who are making money in the forex markets, you want to ensure you are dealing with a reputable banker or company involved in forex trading. With the spur of interest in the forex markets, there are many types of companies that are popping out on the Internet appearing to be genuine forex trading companies but in reality, they are not. Forex trading can be completed through a broker, a company that deals in the funds, and from within your own country. For example, the US has many regulations and laws regarding forex trading and what companies are permitted to work with the public dealing with international trading and markets.

Practicing in the Forex Market

admin — Fri, 14 May 2010 23:00:00 +0000