No matter how good your penny stock trading system may be, there are enough dangers in penny stocks to prevent it from delivering the regular profits that you might expect of it. There is a simple solution, but it means adapting what you’ve learned trading penny stocks to another market – covered warrants. Let me expand on that.
Trading penny stocks can be very profitable on occasion. They can suddenly increase in price by sometimes 100 per cent or more in days. Increases of 500 per cent in a couple of weeks have been known. No wonder they’re so popular.
But, of course, this comes at a price. The price can go down as well as up, and many traders have been caught out by a sudden fall in the share price. Even when the price has gone up it can be very difficult to sell the shares. This is because most penny share companies are very small and there is therefore a lack of liquidity, with few people buying or selling the shares.
There’s often no regulation at first. Information about the issue and the company can be hard to obtain and may be unreliable. The share price is therefore very difficult to put a value on. The share issue is normally not very large, it is usually thinly traded and is therefore easily manipulated.
Then there is the “pump and dump” scam. False information can be spread, usually involving a fantastic story of a technological breakthrough of some kind that will bring in large profits. If you’re offered shares that have recently increased in value, through a not-very-well-known broker against such a background then be on guard. Does your penny stock trading system protect you from this?
Most brokers dealing in penny shares operate a spread rather than charge a commission. The difference between the selling price and the buying price can often be 25 to 33 per cent, and sometimes up to over 100 per cent. And there are two sets of bid and ask prices – the inside and the outside.
Add to this the fact that brokers often mark the prices up on top of that, to cover the extra risk, and you have a situation just made for exploitation of the unwary by the unscrupulous. In any event this helps explain why penny shares are usually over-priced, and the windfall profits sought after by traders are so elusive, no matter how good their trading system is.
Every reason you can think of, really, not to get involved in penny stocks, no matter what stock trading tools you have.
So why not look at another investment vehicle that also allows you to get your foot in the door with a limited amount of capital, offers frequent profits of 200 per cent or more, but without the risks of penny shares?
I’m referring to covered warrants. These enable you to effectively buy the right to a newly issued security at a fixed price at a certain date in the near future. There’s unlimited upside potential with strictly limited downside risk. And they can be traded in the stock market, with the underlying share being in a larger, more reliable company and therefore less-prone-to-manipulation than penny shares.
They are certainly worth finding out more about.
Philip Gegan
