Penny Stocks Risk Profiles Create Appeal for All Investing Method Types
Investors today fall into two very distinct and separate categories. They either prefer a “buy-and-hold” strategy for the long-term with minor tweaking along the way, or a more active lifestyle involving active training where short-term gains are the goal and market volatility, the instrument for plying their craft. The two investment styles actually mirror the two prevailing personality types in our society, perhaps, the reason for today’s obvious divisions within the investing community. If we ignore the constant bickering on which style is better, then one thing that both camps can agree on is that penny stocks offer ample opportunities for both investing styles to profit from applying their own proprietary strategies.
As a starting point, how do we define “good penny stocks“? Unfortunately, there is no clear definition for a penny stock, or micro-cap or junior. Terms have evolved to describe the category, but these have come after the fact, and not one single term is adequate. The SEC is direct, but hardly complete in their appraisal. It is a stock that trades for “less than $5.00 and either trades in the ‘pink sheets’ or over the NASDAQ”. However, there are many substantial companies trading at this tier that have yet to move to a higher exchange, so additional clarifications such as limited operating history or less than $4 million in net tangible assets are added. The OTC is abundant with emerging companies of this genre, and many claim the entire OTC market to be the penny stock world.
Make no mistake about it. These companies are either in or have migrated beyond the early start-up stage. Public disclosure standards are more lax, making research a bit more tenuous at times, but there are many excellent websites and newsletters available to guide the uninitiated investor toward usable information. Market capitalizations tend to be below $1 billion, another convenient boundary identifier, and liquidity is a major concern for both buying and selling shares.
All of these facts serve to place penny stocks on the higher end of the risk profile scale for all investment vehicles. They are not necessarily as risky as many alternative forms of investing, but a wise investor would accept that specialized training and knowledge are key to developing winning trading strategies in this environment. The reality is that for those favoring a “swing trading” set of conditions, whether from the options, commodities or currency trading world, penny stocks are an appealing vehicle to consider.
Curious investors must have an appetite and high tolerance for risk. These stocks have high volatility and are thinly traded, even though daily turnover can exceed hundreds of millions of shares for sub-penny stocks. For a swing trader, volatility is actually desirable. A Forex trader will find that his skills in interpreting chart patterns and related indicators easily transfer to this micro-cap world. Wisely guided execution is the watchword, and entry and exit positions should be defined before the first trade is even implemented. Consistency is the overall objective, since indicators are fallible and trading errors will occur.
As in the Forex world, a disciplined approach to the market, free from the negative distractions of human emotions, is a must. A swing trading mentality requires cool nerves and the ability to stay in a winning trade or abandon a loser when your emotions are screaming at you to do the opposite. Practice trading using real time data and a journal is a good method for developing a durable trading regimen that will stand up under stress when pressure is likely to rise.
Finding acceptable candidates in the penny stock world is part of the allure. As with prospectors of old, there is no thrill like finding a golden nugget before anyone else has noticed the gleam in the stream. The potential for outrageous returns has drawn in even the most cautious of investors from time to time, hunting for the next blockbuster. For the serious “buy-and-hold” investor, a detailed research regimen forms his path to wealth building. Stock screening tools in combination with guidance from experts in the field can turn up companies with stable revenue streams and balance sheets that are preparing for hyper-growth. These investors may fish nearer the surface, but the goal is to find the next long-term winner in the mix.
Penny stocks and micro-caps offer desirable characteristics that appeal to both the “buy-and-hold”, as well as, the “swing trading” style of investor. With the assistance of professionals in the field, this investment vehicle can offer enormous profit opportunities as long as the risks are properly mitigated by focused research and prudent trading techniques. Emerging market companies, filled with entrepreneurial spirit, are what American business is all about, and their success creates appeal for all investors, regardless of investment style or preference.
“Written by guest contributor Jennifer Gorton from Forex Traders”
Tags: good penny stocks, market volatility, micro cap stocks, otc stocks, penny stock world, pink sheets, trading strategies