Leverage and Trading Penny Stocks
July 29, 2008
If there is one big advantage to trading penny stocks, it would have to be the fact that it offers incredible trading leverage. That’s what makes it so perfect as a trading vehicle for beginners to the stock market.
Most so-called experts of the stock market always tell traders to buy the blue chips stocks and build a portfolio. They tell you to buy stocks like Wal-Mart, Exxon, etc… The problem with that is that most new traders to the market don’t have a $100,000 to invest and build a portfolio full of Microsofts.
For example, let’s say that most new traders have $3,000 to invest in the stock market. If that trader took the advice of most analysts, how much of a portfolio do you think they are going to have? They’ll be lucky to have 100 shares of one of these companies, much less an entire portfolio.
Now, take a look and see how far that money would stretch if the trader just traded penny stocks. They would be able to buy 7500 shares of 25 cent stock. They could even take that money and invest it in an all-penny stock portfolio.
That’s the amazing thing about leverage. You’re able to get more shares of more stocks and your risk to reward ratio is so much better than if you traded the blue chip stocks.
Do you really think you’re going to get an amazing return on investment from a company like Dell? I wouldn’t expect to.
Companies like these have already grown to be market leaders. They aren’t exactly hidden gems. Their market value is already in to the price of the stock. It’s the kind of stocks that people are lucky to get 10% return a year.
But with penny stocks, the sky is the limit. There have been penny stocks that have gone up as much as 500% in a day. It’s not that uncommon for a small unknown to explode onto the market scene.
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