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Published On: Fri, Dec 28th, 2012

An Introduction to Penny Stocks and how they can be traded

Penny stocks are a huge attraction for many investors thanks to the massive gains that can be made with them.  Sadly though, these huge gains are rarely realised.  I mean come on, if it was that easy to ‘multi bag’, everyone would be doing it right?

The problem with penny shares is that they are cheap for a reason.  Perhaps the company is new to the market without a proven track record, perhaps they are lacking funding or maybe they are a speculative buy for another reason such as having unproven assets.

This is NOT to say that all penny stocks are bad investments.  It is important, as it is with any stock investment, to research the company using fundamental analysis or trade it using technical analysis methods. Ideally you want to be using a combination of both analytical methods although many people specialise in one.

Ways you can trade Penny Stocks

Share purchases

Many people’s preferred method for getting involved with penny stocks is to use a stock broker to purchase shares in the company.  The broker will normally charge a small spread and a fee for arranging the trade

Spread Betting

Many people who day trade use spread betting to do so and many spread betting companies offer access to alternative investment markets.  The AIM market is where you will find most penny stocks.  Trading penny stocks tends to be more expensive than more mainstream shares as the market is less liquid and there is more risk associated with these companies.

Options

Options give the buyer the opportunity to purchase a set number of shares within a company for a predetermined price within a particular timeframe. They are particularly popular within the USA where they were first used as a financial instrument.  The beauty of options is that they give the owner the right but not the obligation to purchase shares at the pre-determined price although a premium is paid initially for this luxury.

CFDs

CFD stands for contracts for differences – a contract between two parties where one pays the other the difference between the opening and closing prices of a financial asset.  Most financial assets are tradable and the bigger broker offer access to penny stocks.

Binary Options

Although binary options are predominantly used for trading forex, some brokers do allow access to stocks traded on such markets as AIM.  They are very straight forward and easy to use ways of trading the markets – just click whether you think the price will go up or down over a set time frame.  If the price goes in your favour then you will win a pre-determined profit.  If it goes against you then your initial stake will be lost.

Top Penny Stock Tip

Range Resources  (RRS/RRL).  Dual listed oil exploration company, Range Resources are a company to watch for 2013.  2012 wasn’t their best year although they have vast proven oil reserves in Trinidad and Tobago as well as other interests in Colombia, Texas, Georgia and Puntland (Somalia).  They are currently trading on the AIM index in London at 3.6 pence per share but have targets with some of the top brokers of 12-25p.  They could easily reach 50p within the next couple of years.

In conclusion:

Penny stocks are a massive draw for many people.  Many investors will choose a number of high risk companies with the expectation that a loss will be incurred on the majority with the hope that one will ‘multi-bag’.  This is a valid investment strategy although adequate research should be undertaken with any company that is invested into.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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