29/01: Make Money Online - Trading Penny Stocks

A completely different slant on using the internet to make money today.

Before saying anything you should know this - you need to have some money to invest. it's high risk, you can make good money, you can lose your shirt. There, fair warning if you don't want to read any more.

I'll be brief, because much has been written about trading stock, in particular penny stocks, online and by far more qualified people than me.

If the idea of an exciting risky investment strategy appeals to you, trading penny stocks could be the adrenalin fix you are seeking. It's pretty simple to get started, but success or failure are equally possible results.

Firstly, penny stocks are usually defined as stocks trading at below $5 a share. Some people consider this arbitrary amount differently and would say that $2 would be a better yardstick, but, whatever the definition, these are shares usually traded outside of the major exchanges. They are often volatile and unpredictable and their performance is very difficult to monitor or foresee.

Trading stock online is not difficult, although I would recommend a lot of study before you get involved. Once you have a basic understanding of how it works and decide to give it a try, you will need an account with an online stockbroker.

For penny stock trading Lowtrades.com offer a very good service. To set up an account you will need to submit an application form by post. This can be downloaded in PDF format from their site. Once you have opened an account you will need to fund it (more details of how to do this are listed at the site too) and then, you are ready to trade.

In very simplistic terms you will place orders with your broker via the online trading interface and they will carry out your buying and selling instructions. Each trade you carry out, buying or selling, will cost you a small commission to the broker. With Lowtrades usually around $5. Full details are on the site once again.

The rewards can be tremendous - it is entirely possible to make hundreds of dollars in a day. As an example I bought stock on a recommendation on a Monday morning that made me over $600 before trading closed at the end of the day. Sounds great? Well, as long as you remember it could just have easily lost me that amount too. 

Here's a look at another recent stock pick by way of example:-

The stock price was $5.40 when trading closed on Friday 25 January, the day it was recommended as a potentially good buy. An investor with $1000 available to buy could grab around 185 shares at this price.

The screenshot below shows the closing price on the following Monday 28 January - $5.98 For our $1000 dollar investment that's a $107 profit less commissions. OK, so, not brilliant, but you're in the black. 

Our investor therefore had potential profit of $201 had he or she sold all shares at the peak. If they've held onto the stock they still finish the day at $180 up. What will happen tomorrow? Well, that's the buzz of trading, you don't know for sure - you might be kicking yourself for selling and getting out too early, or you could be riding a bigger wave for a while.

As it turned out the stock price peaked at $7.22 and has since fallen back to around $6.44 on February 7 2008.  

There is no minimum required to open a trading account with Lowtrade by the way. It stands to reason that the more you are prepared to invest - the larger the potential gains/losses. Still, whether it's 200, 2000 or 20000, a profit is a profit and our investor did pretty well, pretty quickly!

My advice is always this  - never invest anything that you can't afford to lose. This is a gamble, and if you don't have the constitution for risking the purchase price, don't start with online trading of any kind. Temptation is a sneaky thing - when dollar signs are obscuring the clarity of your vision, sit back and have a good think about what you are planning to do.

Now, I will close by saying that just as in so many areas, there are plenty of hucksters  involved in the penny stock markets, just as there always are in any area where there is money to be made. I would recommend you read up on some of the tricks that are often pulled by unscrupulous people who will use tactics like "pump and dump" where they will try to push up a stock's price with loads of unfounded hype and the dump their own holdings on unsuspecting traders. This is illegal of course but it does happen.

If you want to start trading penny stocks online, read up on the subject carefully and learn as much as you can. There are plenty of helpful websites such as AllPennyStocks.com where you can begin to learn.

I edited this post having initially mentioned a newsletter subscription sold via Clickbank. Some people swear by it and it has produced some good picks, but others believe that there are some problems with the site and its operators. I've now decided to stop promoting it due to the rising level of complaints, despite the fact that it has topped Clickbank's sales charts for some time. For a great range of stock trading publications and advice visit my Stock Trading Ebook and Software pages.

If you're new to trading stocks, I've given you a few cautionary tales but with due diligence and learning you can find the winners. I always think carefully before recommending risky ventures, but I've given you the information to start investigating. Where you go from there is entirely up to you :-)

TCH

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