What Type of Traders are Attracted to Penny Stocks?

Usually seasoned investors are attracted to micro cap equities due to their volatility. This makes for a larger price move in shorter time frames with a greater upside potential on a percentage basis. Another type of investor, that may ignore the volatility, is an investor wanting to start with a small monetary investment. This is where the term “buyer beware” may come into play.

What are the Risks of Penny Stock Investments?

The obvious risk for penny stocks is volatility for first time investors trying to get their feet wet in the market. Companies in the micro cap category are often less secure, and do not pay dividends. Penny stocks aren’t subject to the same type of requirements as Blue Chip equities, so there is more room for price manipulation. Seasoned investors or organizations can buy up large amounts of these stocks and drive up the market price for their own purposes. Therefore, even though they are called penny stocks, you may have a higher risk. However, this can be offset by the possibility of a much higher return on your investment.

What Should I Do to Get Started in Penny Stocks?

The very first thing is research the market; know what you are getting into. There are opportunities for good investments to take you out of the speculator realm, but that will come with time if you are a novice. Visit forums where you can learn penny stocks, so that you can now what signals to look for when buying and selling, and when to take advantage of these signs. Use your brain and not your heart, due to the volatility of quick decisions.

The term “penny stock” is used on the market for several reasons. It can be a reasonable investment when you are aware of the pitfalls, but it can also be very detrimental due to the loosely based criteria for fraud protection. Know your market.

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Here are the other five things to know when shorting stocks.

6. Margin Calls – This is probably the scariest thing about owning a short position in any company.If the stock you’ve decided to short moves in the wrong way (stock price rises), your broker will insist that you do one of two things. One, deposit more money into your account, enough to cover the purchase price of the stock at the current price. The other choice is that your broker will insist that you sell some of your long positions to cover the margin call or they will do it for you in their own way.

7. Early Sale – If the original owner of the shares that you borrowed decides to that they want to sell the stock, you must replace it — either by finding other shares through your broker or buying it on the open market. Remember all you did originally was “borrow” the shares.

8. Short Squeeze – If you’re new to the stock market then this is a term that you might not be familiar with. It’s a term that is used quite often on Wall Street. A short squeeze is when the price of the stock jumps up in value quickly, causing short traders to “cover” their positions. Which means that they have to buy shares to cover the ones that they borrowed. This typically causes higher prices, which prompts more people to sell and to take profits. This is something that you may never want to get caught in the middle of because of the ferocity of the situation as well as get quite expensive.

9. Properly Covering You Position – You may not even realize it, but you can have a short and a long position at the same time. When you go to “cover” your short position, you need to tell your broker clearly that the shares you’re buying are to cover your short position. If you just buy the share while still having a short position, you’ll have conflicting positions. Many times people are in a rush to cover their position, that they may not even realize their mistake of overlooking their selection, especially online traders.

10. Dividends And Taxes – If you have borrowed and shorted a dividend-paying stock, you will receive the dividends, but you, in turn, must pay the original owner the value of those dividends. Also, should you hold a short position for more than one year, well, tough luck — the IRS still treats capital gains as short-term gains. Ah, Uncle Sam is always reliable!

I hope these ten things I’ve given to you will help you in your trading. If you are new to the stock market, then it’s wise to stay away from shorting stocks until you learned more of the basics.

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A DRIP is a program run in-house by a publicly listed company. They are often offered to employees of the company, but they are also open to external investors who can meet the companies minimum share threshold to participate – usually this threshold is quite low.

The benefit of DRIP investment is that you can start with a very low volume of shares, and gradually increase your shares over time. You usually set a fixed cash amount that you will use every month to buy more shares, and this can be set up to be automatically deducted from your bank account – in essence, it is a forced savings system. The strength of a DRIP lies in the fact that any dividends paid by the company on your shares are automatically reinvested, and this has a compounding effect on your number of shares over time. Many companies also offer shares to participants in the program at a reduced rate, and of course you pay no brokers fees if dealing directly with the company!

Although it might not suit day traders out for short term gain, a DRIP is a great tool to have in your arsenal when building a long term portfolio.

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1. What is the fund’s goal?
The fund’s goal should match your own. If your goals change over time, you may need to reevaluate your investments. If you invest primarily for growth, your goal is to increase the value of your investment over the long term. If you invest primarily for income, your goal is to receive a regular flow of earnings from your investment. If you invest primarily for stability, your goal is to protect your investment from loss. No investment can maximize all three goals simultaneously. Some funds emphasize one goal; others try to assign priorities among goals; still others try to strike a balance among different goals.

2. What is the fund’s investment strategy?
The prospectus describes the range of securities the fund may purchase, how it selects them, the types of securities it emphasizes, and investment practices the fund may use. The fund’s investment strategy relates to its, and  your goals.

3. What are the fund’s fees and expenses?
All funds must fully disclose their fees and expenses in a table at the front of the prospectus. To make it easy to understand and compare to different funds, all fee tables must follow a standardized format. You must decide if the cost of owning a particular fund is acceptable to you.

4. How are the fund’s distributions made and taxed?
Fund distributions—your earnings—include dividends earned on the investments the fund holds, and any capital gains made when the fund sells investments for more than it paid for them. Funds must make distributions at least once each year. Many shareholders elect to have their distributions reinvested in the purchase of additional shares of the fund, rather than taking them out as cash. It may also be important to you to determine when distributions are made and how they’re taxed. You will be taxed on all taxable distributions, whether you take them as cash or reinvest them in additional shares. Of course, if you sell your fund shares, you may realize a gain or loss which is subject to taxation.

5. How can you buy fund shares?
Some mutual funds offer their shares through investment professionals who provide investment advice, such as brokers, bank representatives, and financial planners. Other funds offer shares directly to investors through the mail, by telephone, over the Internet, or at their own retail offices. Funds may also be offered through employer retirement plans. No matter how or where you invest, mutual funds, unlike bank deposits, are not insured or guaranteed by the federal government.

6. How can you sell fund shares?
By law, the fund must stand ready to buy back your shares on any business day. Depending on their value at the time you redeem, you may receive more or less than you paid for them. Redemptions may be made by contacting the fund company directly or through your investment professional

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