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Speculation Tips For Penny Stock Investing

Feb 1, 2008
Many people are attracted to the stock market, as they should be for investment purposes. The stock market has always been a valid option for people to build a retirement fund or a nest egg over time, provided they are savvy enough to pick the correct stock or fund. Many times, there is not enough time to devote to financial planning so a reputable financial planner is enlisted for guidance. This scenario is the usual way people approach the stock market, however, speculation is another way people use the stock market to make money.

Speculation comes in many forms with the stock market, usually by people that have enough disposable income to absorb a loss. Futures trading or commodity trading is one form of highly speculative investing or trading. Another is option trading. Stock options are derivatives that get their value from the underlying stock and can be highly speculative as they can expire worthless in a given period of time, unlike stocks. One good thing about stock options, the amount of money a person can lose is the amount spent on the options, unlike short selling, which can become extreme losses if a person is on the wrong side of the trade.

Another form of speculation is penny stock trading. Penny stocks, as tradition states, are any stock that trades below five dollars. However, for the purpose of this article, any stock trading below one dollar is a true penny stock. Many people are attracted to penny stocks because of their low price and the amount of shares that can be purchased for less money than larger stocks. One major drawback of penny stocks is that they are thinly traded and can go weeks or months without a single trade being executed by market makers. Usually the companies trading on penny stock exchanges are smaller companies with little or no cash, or shell companies with no viable business operating within the shell.

Penny stocks are wrought with fraud in some cases as unscrupulous characters tout these thinly trade stocks over the Internet or newsletters, selling their shares into penny investors as the share price increases. However, this is not always the case. There are viable start up companies trading on the penny stock exchanges that have a sound business plan with exciting futures, but little cash. When penny stock investors are fortunate enough to invest in one of these companies, gains in the stock price can be one thousand percent or better.

A speculation in penny stocks unfortunately is mostly done by people with little cash available for speculation and are unable to withstand the loss. Attracted to the inexpensive cost of these stocks, speculators more time than not, lose their investment and in some cases average down by purchasing more stock as the share price tumbles with the hope that the stock will return to previous highs. In some cases the penny stock investor does realize gains after averaging down, but this is not the norm.

Penny stock investing should be approached with caution and proper research should be done before buying equity in the company. Diamonds in the rough are out there trading on the penny stock exchanges, but honest research and a critical thinking should be applied before deciding to become a shareholder in a smallcap company. Due diligence is key to making informed decisions when considering a penny stock company.
About the Author
Doug Fisher is a smallcap trader and investor with eight years of experience in smallcap trading. Learn more about penny stock trading and investing.
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