Penny Stock Trading vs. Investing – Know The Difference

Whether you’re an experienced investor or a beginner, one fact about penny stocks always rings true – their allure is based on the fact that it doesn’t cost a great deal of money to get started and you have the opportunity to make some very large profits. Naturally, it’s considerably easier to profit if you know what you’re doing. However, the odds are stacked against you when you lack the necessary investment knowledge. Even worse is the fact that there is a great deal of manipulation and scamming that you could be exposed to when investing in penny stocks.

It’s no secret that the average investor can’t afford shares of Apple or Google stock. For those investors, penny stocks are too good to ignore. Granted, you can earn a healthy return . . . provided things work in your favor. For instance, if you purchase 5,000 shares of stock at $.40 each and the price doubles to $.80, you’ve doubled your money ($2,000 invested / $4,000 returned). Hence the reason, penny stocks are so enticing for many investors and people make so much money quickly. But the risks are always there, which you need to be aware of before investing.

Let’s talk Dollars and Sense for a Minute

Promoters of penny stocks put disclaimers on everything whether it’s their emails, Facebook page, or Twitter page. However, they use disclaimer language to deceive and embellish. Although penny stock promoters always manage to steer clear of the SEC and securities regulators, you’ll still hear of cases where the SEC put the pinch on manipulators and scammers.

10 Rules for Trading Penny Stocks

Despite the dangers involved with trading penny stocks, many individuals still dive into the game. So even if you get phone calls from promoters or you see advertisements that promise large returns for a small investment just follow these 10 rules and you could avoid getting stung:

• Avoid short selling

• Buy penny stocks with a good earnings record

• Focus on stocks with higher trading volumes

• Ignore the success stories

• Limit the size of the trade

• NEVER fall in love with a penny stock

• Once you’ve made a profit, sell those shares ASAP

• Read the disclaimers and disregard any “tips” that you get

• Trust no one, especially company management

• Use mental stops, not stop-losses

So does this mean that you should avoid trading stocks? Absolutely not. If penny stocks are a better fit based on your budget and trading strategy, then by all means, go for it. Just keep in mind that many successful individuals who got their start in the penny stock world, eventually moved to long-term options.

Investing vs. Trading Penny Stocks

Do you want to start trading penny stocks (keyword here is “start”)? Most beginning traders don’t have the kind of money that it takes to purchase shares of Apple or Netflix. After conducting numerous Google searches, they decide to trade penny stocks in the hopes of realizing large gains on small investments. For them, the promise of sizeable gains without investing a lot of money is just too enticing to pass up. However, the real question is “Have you ever considered long-term investing vs. trading penny stocks?”

If you aren’t sure how they differ we’ve covered that below so you can make the best decision possible based on your current budget, needs, and strategies. Investing and trading are two ways of generating a profit in a major market or an exchange. However, those goals are pursued in different ways. In the simplest of explanations, investing is about the purchase of stock shares with a long-term goal in mind while trading is about buying and selling in order to earn short-term profits.

Investors have a long-term mentality or outlook. In other, words they will hold onto a stock for years despite the market’s rising and falling. Conversely, penny stock traders buy and sell their shares of stock over a period of weeks, days, and sometimes even minutes. The aim is to realize short-term profits. While investors tend to focus on a company’s long-term performance, the penny stock trader will look at price movement directions and try to figure out a way to profit from that.

It’s a Matter of Timing

Whether you’re investing for the long-term or trading penny stocks in the hopes of realizing short-term gains, the key is timing – knowing when to get in and when to get out. Timing is the most significant difference between investors and penny stock traders. However, there is a dramatic difference in each one’s focus. Be aware that there are three types of stock traders as follows:

• Day traders – focus on the trading day

• Scalp traders – are in a position no longer than a few minutes

• Swing traders – invest for days or even weeks at a time

The smart investor will research the potential for growth over the long-term while penny stock traders will look for small miss-pricing opportunities (e.g. the political uncertainty of foreign countries that could negatively impact a US company’s share price).

How to make wise Investments

With the right investment, you can build long-term wealth. A good example of this would be someone who invested in the S & P 500 Index in March of 2009. That index has risen 250% since that time. Recent studies show how stock market investments can earn millions in retirement funds compared to what it would earn in a conventional savings account or just saving the cash at home. Here are a couple of tips for making wise investments:

• Always be prepared for the long term – this is going to require a great deal of discipline and patience to survive the stock markets ups and downs.

• Develop a challenging yet realistic investment plan – whether you’re buying, re-balancing, or selling your stocks, you want to ensure that your portfolio is aligned with your original investment goals. You’ll be better protected if market moves get out of whack.

Although trading over the short-term may feel good at times, the savvy investor knows that time is their best friend.

Minimizing Risk with smart Trading

Trading penny stocks is the same as trading conventional stocks in one respect only – they both involve an element of risk. If you want to start trading stocks, here are some suggestions that will help to minimize the risks involved:

• Create a buy and sell plan that fits your budget and financial needs.

• Establish a limit of how much you can afford losing and don’t exceed it.

• Stick to your plan. This is easily the most difficult aspect of trading conventional stocks or penny stocks.

• Enter into trades with both eyes open. There are sophisticated algorithms that trade on the market’s small inefficiencies.

• Be aware of your taxes. You could qualify for trading cost deductions, but you might owe anywhere up to 37%.

For those of you who have never invested in one of the major markets or traded penny stocks in the OTCBB or Pink Sheets, Investors Hangout offers discussion forums and stock message boards. We also feature live feeds regarding the hottest stocks. For more information, please visit our website and get the latest information on the right investments.