Finding the Elixir to Unravelling Stock Market Behavior
The financial markets remain a mystery to the most astute minds. Not even genius powers of prediction can anticipate what the market will do at any given time. This naturally lends to a different set of approaches designed to help traders and investors better understand market mechanics.
The key it seems, is to deconstruct the market into components. By dissecting the macroeconomy into smaller parts, we can better understand the effects of supply and demand on pricing. Viewed in perspective, each of these core components interacts with one another in a synergistic way, to create a big picture.
A Component of the Market: Penny Stocks
One of the components of the markets is penny stocks. These financial instruments function differently to traditional stocks, and blue-chip stocks in particular. For one thing, penny stocks are priced up to $5, no more. They are either traded OTC, or on the exchanges like the NASDAQ Composite Index, or the NYSE.
As a newcomer to the scene, avoid trading over-the-counter stocks, because they’re not listed. There is little or no adherence to financial reporting requirements, transparency, and disclosures. With that out of the way, it’s worth pointing out why penny stocks trading can be so lucrative while traditional stocks generate ‘comparatively’ flat returns over time.
Penny stocks are cheap. This entices a lot more traders into the fold. Already we are seeing a rush of traders who want to learn how to trade penny stocks online. A small dollar account at a penny stocks platform or brokerage can yield outsized returns. An example will help to clarify just how powerful price is in terms of profit potential.
Assuming a trader has $1000 available, how might these trades play out?
- Penny stock A trading at $0.05 per share
- Blue-chip stock B trading at $200 per share
With stock A, the trader can purchase 20,000 shares, and with stock B, the trader can purchase 5 shares. Penny stocks can rise in value 100% + within a day, while traditional stocks typically move perhaps 1% on average. When these figures are translated into dollar value, big changes are seen.
- Penny stock A trading at $0.10 per share X 20,000 shares = $2000 total portfolio value
- Blue-chip stock B trading at $202 per share X 5 shares = $1010 total portfolio value
These numbers are provided for illustrative purposes only. It is entirely possible that penny stocks can fall to 0 just as easily as they can double, triple, or quadruple in price in any given day. As a day trader, it is important to bear all of this in mind. Penny stocks are inherently riskier than big name brand stocks.
They don’t have much history, they have yet to prove themselves, and they are yet to establish themselves in the market. The reason traders can generate so much more money (and profits) than investors, per unit time is that they are continually rolling over the same money + profits into new investments to generate new profits, and so it goes.
Trading Offers you An Edge with the Multiplier Effect
There is a multiplier effect at work with trading, compared to investing where your capital is essentially decommissioned. It is locked up in an investment, and subject to whatever that investment is going to do for a lengthy period of time. Naturally, the best penny stocks to trade are the Tier 1 stocks which are required by the SEC to disclose financial information.
This means that manipulation is less of a factor with the stocks. The worst categories of penny stocks are those where the stock is priced in fractions of a penny. There is too much manipulation, and a severe lack of oversight with these sub-penny stocks. Now that you understand a little bit more about the types of penny stocks available, and where they can be traded, it’s time to learn how to trade them.
The golden rule for penny stocks trading is this: Find stocks with big movement potential before they move. Set a clear exit strategy and do not be dissuaded, deterred, or distracted. Set a clear take profit strategy, and do not worry about what happens after your trade target has been reached.
What Tools and Resources Are Available to Find the Best Performing Penny Stocks?
The best way to learn how to trade penny stocks is with a reputable platform which offers a stocks scanner like Oracle. At Stocks to Trade (STT) for example, this artificial intelligence technology automatically scans the markets for the most lucrative trades, with high volatility, and upward momentum. There are of course many trading tools and resources which can be used, with varying degrees of efficacy.
The erstwhile method of scanning through a stock’s list on the back of a newspaper are gone. Those methods have been phased out with the dinosaurs. Today, everything happens digitally within split seconds. Sometimes, penny stock traders try to use arbitrage between markets to capitalize off minuscule price differences. As a new trader, it is better to invest a small amount in a penny stocks trading account. Profits are generated incrementally, also in small amounts, over time.
There is no substitute for education in trading. As a matter of fact, the world’s most successful traders are always learning, experimenting, and listening to the advice of expert traders. The acquisition of knowledge is the primary objective of every successful trader. Profits will follow when you really know what you’re doing.