Having the right mindset when starting out in penny stock investing is crucial to success. Are you a penny stock trader or do you want to invest in penny stocks? The difference in investing and trading makes a huge difference in what you can expect from your penny stocks. In this article we explore the differences between trading and investing, and how one might need to adjust expectations depending on the type of activity.
Penny Stock Trading
Penny stocks usually do not have large trading volumes. Because of this the daily price can be very sensitive to every piece of corporate information that comes out. Even a rumor can make the price of a penny stock spike wildly up or down. Prices also fluctuate due to the action of investors and traders buying the selling the stock in response to external news or market conditions.
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Traders generally try to profit from the up and down price movements that occur daily. Many people are familiar with the term ‘Day Trader’. This is simply an individual who buys and sells stocks during market hours and closes all open positions before the end of the trading session. Traders often buy and sell stocks based on breaking news reports, Twitter topics, chat room discussions, or their own ‘gut feelings’.
A Trader may also use technical analysis, chart patterns, or some algorithmic formula to make decisions on whether to buy or sell. These trades are normally held anywhere from a few seconds to a few hours. A trader may make only one or two trades per day or several thousand - depending on the style of trading that is used.
Traders make money by having more positive trades than negative trades. The key is to be able to manage losing trades so that losses are not too extreme. There are several formulas that are used to calculate what size and percent of winning vs. losing trades must be maintained in order for a trader to be profitable. Most day traders are not able to successfully navigate the winning-losing trade balancing act and are never able to trade profitably.
Learning as much as possible about every aspect of an investment that you are thinking about making. Armed with this knowledge you can have a better understanding of what you can expect from your penny stock today and project your analysis into the future. Being selective in the penny stocks to watch today will yield positive results later.
Penny Stock Investing
In stark contrast to day traders, investors concern themselves with a longer-term outlook. The daily price fluctuations are secondary to an investor. It is what is expected to happen over a time period of several months or even years that is more interesting.
Investors buy and sell penny stocks based on their analysis of what the potential is of a company to grow and become more profitable. Many investors use fundamental analysis to analyze the stock of companies they are interested in. This involves performing due diligence including: company financials, press releases, CEO and board member history, corporate report filings, bank analyst reports, and any other pertinent information. This information can give insight into how much potential a small, struggling company has to grow into an industry sector powerhouse. And eventually this will give you an idea on the best penny stocks to buy today.
However, companies usually do not grow into industry sector powerhouses overnight. The time frame for an investment to be held is often measured in years. The good thing about this is that a company that experiences slow steady growth over a long time frame can often yield very high multiples of an investor’s initial investment. Sometimes an investor might make a several hundred or even several thousand percent returns. Investing for the long haul means that the possibility of finding a corporate diamond in your portfolio is very possible.
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So...What Can You Expect?
The answer to this question depends on whether you want to be a trader or an investor. If you like the fast paced ups and downs of the market then trading might be for you. You can expect to rely more on chart patterns, indicators, and analytical methods to make your buy and sell decisions about which penny stocks to buy today. Your daily percent return will normally not be to high and you should expect to have a lot of small average winning trades. Along the way you will most likely have a few big winning trades and some big losing trades. These will be the trades that you will talk about and remember the most!
If you are an investor you should expect less excitement from trading action and more excitement from doing research and finding hidden nuggets of information. Discovering a company’s hidden potential or some fact that you figure out before anyone else can be just as exhilarating as day trading. Maybe even more because finding such information could possibly make a fortune.
Whichever path you choose you should expect that it will take a great deal of work to become successful. People who are looking to get rich overnight from trading or investing are setting themselves up for bitter disappointment. The price action of your penny stock today or any individual day is not overly important. However it is important to have a consistent plan of action without trying to micromanage the market. This is an impossible task! Whether you will buy and sell stocks for the long term or the short term, take your time and develop good habits - your brokerage account will thank you!