Starting up, Penny stocks?

[kngavl]

So I'm awaiting my account to be activated with my broker but as a young trader, and ambitious, I only have a few hundred dollars to work with. With this in mind, penny stocks are very .. whats the word... appealing to me. I would like to trade with around 200-300$ as this is the amount of money I am willing to lose. I've been looking at some penny stocks trading at the .02-.025 level, been trading there consistantly for the past couple months and never going lower then .02. From how I understand this, I could purchase 10000 shares of the stock for 200$ and as it has a trading volume in the 100 000s of thousands. Now if it goes up to .025, as it does daily and multiple times I'll get 50$ +/-10ish.
Does it make sense to still go with other higher priced stocks? I jsut don't ahve the money and I don't want my money to sit in my account for months while I wait for some 5$ stock (which I could buy 40 shares of) to go up over a dollar and frankly it's much more likely that my .02 stock will go up to .03 or .025 then a 5$ stock to hit 6$+ to make the same amount of money.

How can I tell if I'll be able to sell my penny stock?

Oh and howdy!

P.S. I don't want to stay in penny stocks, I want to move out of them once I have significantly more money to work with.
Thanks in advance.

 

[Chorlton]

So I'm awaiting my account to be activated with my broker but as a young trader, and ambitious, I only have a few hundred dollars to work with. With this in mind, penny stocks are very .. whats the word... appealing to me. I would like to trade with around 200-300$ as this is the amount of money I am willing to lose. I've been looking at some penny stocks trading at the .02-.025 level, been trading there consistantly for the past couple months and never going lower then .02. From how I understand this, I could purchase 10000 shares of the stock for 200$ and as it has a trading volume in the 100 000s of thousands. Now if it goes up to .025, as it does daily and multiple times I'll get 50$ +/-10ish.
Does it make sense to still go with other higher priced stocks? I jsut don't ahve the money and I don't want my money to sit in my account for months while I wait for some 5$ stock (which I could buy 40 shares of) to go up over a dollar and frankly it's much more likely that my .02 stock will go up to .03 or .025 then a 5$ stock to hit 6$+ to make the same amount of money.

How can I tell if I'll be able to sell my penny stock?

Oh and howdy!

P.S. I don't want to stay in penny stocks, I want to move out of them once I have significantly more money to work with.
Thanks in advance.

I know this isn't the question you are asking but I would seriously considering not investing in Penny Stocks. They appear to be low risk due to their low price but they are a very risky way to invest. I won't bore you with the many reasons as a quick search on this site should supply you with ample info.

If money is really an issue and you are unwilling to hold-off until you have a more reasonable amount of trading capital, then maybe you should look at opening a Spreadbet account and trading very small amounts. As you are leveraged you can make your money work better for you BUT (and I do stress this) you need to understand the basics of trading first such as having a sensible strategy and some idea of Money Management.

All IMO....


PS. In your calculations, you forgot to mention Commission costs. These will significantly eat into any profits given your minimum trading capital........

 

[barjon]

..................and frankly it's much more likely that my .02 stock will go up to .03 or .025 then a 5$ stock to hit 6$+ to make the same amount of money...........

hi knagavl.

welcome

...er, no. The reverse is much more likely.

Penny stocks are very illiquid and there will be a relatively huge spread (difference between buying price and selling price) for you to contend with. Penny stocks are penny stocks because they are tetering on the brink and you'd need to be extremely lucky to hit on a good one. About the only successful strategy is to buy a load of different ones, accepting that most will fail and relying on the odd one or two to come really good.

jon

 

[kngavl]

I did mention commission costs, they are around 14$ for a buy/sell transaction. And I do have money to work with, however I am only willing to lose 200$ at the most so thats what I can begin with. If anything, commission costs are what keep me away from the larger priced stocks.

I've been paper trading for some time and I have received about a 20% return on my trades, of course with loses and some nasty ones however I have managed to get my money back over a week and end the week positivly.

Edit: And this is all in context of day trading, so unless you figured out the most perfect stock and got crazy lucky a 5$ stock wont go up to 6$ while there are dozens of .02-20$ that do fluctuate a 10-20% a day.

Edit again: spelling errors, low light.

 

[Chorlton]

I did mention commission costs, they are around 14$ for a buy/sell transaction. And I do have money to work with, however I am only willing to lose 200$ at the most so thats what I can begin with. If anything, commission costs are what keep me away from the larger priced stocks.

I've been paper trading for some time and I have received about a 20% return on my trades, of course with loses and some nasty ones however I have managed to get my money back over a week and end the week positivly.

Edit: And this is all in context of day trading, so unless you figured out the most perfect stock and got crazy lucky a 5$ stock wont go up to 6$ while there are dozens of .02-20$ that do fluctuate a 10-20% a day.

Edit again: spelling errors, low light.

Commissions would not really increase by much if you buy a more expensive stock. The only increase is in Stamp Duty which in your case would not be very much. (edit: Based on purchasing UK stocks)

I also do not agree that your money has to sit in your account for months waiting for an opportunity. Instead these are available in some form every day.

Jon's comments are spot-on.

However, if you are determined to try this type of strategy then I wish you the best of luck. I tried a similar approach many years ago and found it costly ........

 

[timsk]

How can I tell if I'll be able to sell my penny stock?

Howdy kngavl and welcome to T2W.
I'm sorry to say that I completely agree with Jon and Chorlton. Penny stocks are about as risky as you can get and, contrary to popular belief, not the best starting point for someone with a small account. You didn't mention which stocks you intend to trade but, if by chance it's U.S. stocks, then you'll need an account with a minimum of $25K to comply with SEC regulations. Similar restrictions may apply in Canada - I don't know. Commission costs aren't as big an issue as the bid/offer spread. You hit on this with your own question (quoted). Even if the penny stock rises nicely (assuming you're long), you might struggle to sell at a profit as - in percentage terms - the spreads can be massive. Trying to offload 1,000's of shares in an illiquid stock with a wide spread will quickly reduce your small account to a miniscule one in no time at all. Of all the T2W membership, I don't know of anyone who specializes in day trading penny stocks and this is a community that specializes in embracing risk! Speaks volumes don't you think?
Tim.

 

[kngavl]

Well I thank everyone with the comments. From what I understand and have heard of Canada does not have the same restrictions as the US when it comes to the 25K Rule by the SEC. We have something of the sort but the definitions are so vague and the amount of trades you can do are much higher then the 3/week administered by SEC.
What would be a example of a large spread? Is it considered in a percentage or actual market value?

And the stocks I'm looking at have been consistently trading at over 500K a day and most trades are banks buying other banks shares. Would this still be considered illiquid? I'm looking at delayed Level 2 quotes.

 

[timsk]

hI kngavl,

What would be a example of a large spread? Is it considered in a percentage or actual market value?

Suppose the spead is 1 cent, with the bid and offer at 2 and 3 cents respectively. If you buy 10,000 shares at 3 cents, then the bid has to rise by a massive 50% just to enable you to close the trade at break even. This also supposes that your entire position is filled at the quoted spread. Then you've got commission on top of this. That's a tough row to hoe!

And the stocks I'm looking at have been consistently trading at over 500K a day and most trades are banks buying other banks shares. Would this still be considered illiquid? I'm looking at delayed Level 2 quotes.

Personally, I wouldn't consider 500K illiquid, no. Then again, I don't know of any stocks with a share price of $0.02 that have a daily volume of 500K. This strikes me as being most unusual, but I know nothing about the Canadian stock market.
Tim.

 

[kngavl]

Thank you again for your input, I do realize it's a risky venture and thats why you don't see me starting out with loads of money. Your bid and offer makes sense, but most do fluctuate within that range, or have a spread of .005.
Now another question. I see on some recent trades of volumes like this:
Buy/sell
40000/40000
700/700
1200/1200
50000/50000
2000/2000
180000/180000

Now what I'm seeing is that clearly people are selling and buying multitudes of shares over 10000, however does this necessarily mean that if I placed a AON order at 10000 shares would it be pulled through?

 

[timsk]

Thank you again for your input, I do realize it's a risky venture and thats why you don't see me starting out with loads of money. Your bid and offer makes sense, but most do fluctuate within that range, or have a spread of .005.
Now another question. I see on some recent trades of volumes like this:
Buy/sell
40000/40000
700/700
1200/1200
50000/50000
2000/2000
180000/180000

Now what I'm seeing is that clearly people are selling and buying multitudes of shares over 10000, however does this necessarily mean that if I placed a AON order at 10000 shares would it be pulled through?

Hi kngavl,
I don't think I can really help here as your question relates to a trading style that's alien to me! I've never traded anything like 10,000 shares and never used all-or-none orders. That said, I would imagine that it all depends whether or not there's someone wanting to take the other side of your trade at the size you want. Logic suggests that this is more likely with a small order and less likely with a large one! Sorry I can't be more helpful. If you were to post a chart of a typical stock that you have in mind - especially one trading around $0.02 with 500K daily volume - then this might enable others to post useful comment.
Tim.

 

[kngavl]

Okay now I understand what the bid-ask spread signifies as a problem.
If the bid/ask is .02/.025 that means I'll be able to buy the stock at .025. However I would only be able to sell (probably) at .02, meaning the price of the stock would have to reach say a number like .035 before the bid/ask would be .03/.035. Meaning in a realistic sense I need the price to go up 1 cent before I could make half a cent on the share.
Am I correct in simplifying it that way?

 

[barjon]

Okay now I understand what the bid-ask spread signifies as a problem.
If the bid/ask is .02/.025 that means I'll be able to buy the stock at .025. However I would only be able to sell (probably) at .02, meaning the price of the stock would have to reach say a number like .035 before the bid/ask would be .03/.035. Meaning in a realistic sense I need the price to go up 1 cent before I could make half a cent on the share.
Am I correct in simplifying it that way?

kngavl

That's about it. Don't forget, there is no single "price" of the stock - there is only the bid and ask. The "price" you see on the charts is merely the mid-price twixt bid and ask and just a convenience for painting the picture.

jon

 

[Vrothdar]

Okay now I understand what the bid-ask spread signifies as a problem.
If the bid/ask is .02/.025 that means I'll be able to buy the stock at .025. However I would only be able to sell (probably) at .02, meaning the price of the stock would have to reach say a number like .035 before the bid/ask would be .03/.035. Meaning in a realistic sense I need the price to go up 1 cent before I could make half a cent on the share.
Am I correct in simplifying it that way?

Bingo!

Only thing I'd add is that (in my understanding) if you saw a price of a share quoted with only one price it would be the mid point of the bid/ask spread rather than either the bid or the ask. It's also worth noting that the spread is variable so you need to consider that too.

 

[kngavl]

Yay! Now I get it haha. Although my dreams are now crushed... .
@Barjon
Never thought of it that way, thank you.
@Vrothdar
Is it always the mid? Or could the stock be quoted at .20, however with the bid/ask at .15/.21?

 

[Splitlink]

So I'm awaiting my account to be activated with my broker but as a young trader, and ambitious, I only have a few hundred dollars to work with. With this in mind, penny stocks are very .. whats the word... appealing to me. I would like to trade with around 200-300$ as this is the amount of money I am willing to lose. I've been looking at some penny stocks trading at the .02-.025 level, been trading there consistantly for the past couple months and never going lower then .02. From how I understand this, I could purchase 10000 shares of the stock for 200$ and as it has a trading volume in the 100 000s of thousands. Now if it goes up to .025, as it does daily and multiple times I'll get 50$ +/-10ish.
Does it make sense to still go with other higher priced stocks? I jsut don't ahve the money and I don't want my money to sit in my account for months while I wait for some 5$ stock (which I could buy 40 shares of) to go up over a dollar and frankly it's much more likely that my .02 stock will go up to .03 or .025 then a 5$ stock to hit 6$+ to make the same amount of money.

How can I tell if I'll be able to sell my penny stock?

Oh and howdy!

P.S. I don't want to stay in penny stocks, I want to move out of them once I have significantly more money to work with.
Thanks in advance.

Leave them.

If they are not earning money, then they will need a cash injection later. They will ask the shareholders for it by way of a rights issue, just like the banks are asking right now. You can see what the charts of bank shares look like, right? When they can't get any more money, they will go bust. The government will help the banks. Not so penny shares.

 

[Vrothdar]

Yay! Now I get it haha. Although my dreams are now crushed... .
@Barjon
Never thought of it that way, thank you.
@Vrothdar
Is it always the mid? Or could the stock be quoted at .20, however with the bid/ask at .15/.21?

I can't think of any reason for it to be anything else. Barjon says it's the mid and he's a lot more experienced than me so I'm taking his word for it

 

[fibonelli]

So I'm awaiting my account to be activated with my broker but as a young trader, and ambitious, I only have a few hundred dollars to work with. With this in mind, penny stocks are very .. whats the word... appealing to me. I would like to trade with around 200-300$ as this is the amount of money I am willing to lose. I've been looking at some penny stocks trading at the .02-.025 level, been trading there consistantly for the past couple months and never going lower then .02. From how I understand this, I could purchase 10000 shares of the stock for 200$ and as it has a trading volume in the 100 000s of thousands. Now if it goes up to .025, as it does daily and multiple times I'll get 50$ +/-10ish.
Does it make sense to still go with other higher priced stocks? I jsut don't ahve the money and I don't want my money to sit in my account for months while I wait for some 5$ stock (which I could buy 40 shares of) to go up over a dollar and frankly it's much more likely that my .02 stock will go up to .03 or .025 then a 5$ stock to hit 6$+ to make the same amount of money.

How can I tell if I'll be able to sell my penny stock?

Oh and howdy!

P.S. I don't want to stay in penny stocks, I want to move out of them once I have significantly more money to work with.
Thanks in advance.

Penny shlocks

Can't you find a broker that allows you to trade *nano lots on the FX Markets?

This way you'll trade really small size on very tight spreads without suffering the insane bid offer spread when trading the penny shlocks. :idea:

*say 1 cent per point.

 

[kngavl]

I'll have to check with my broker I guess. Never heard of nano lots though.

 

[kngavl]

Well this is what is coming to mind now.
Is it possible to trade with just 300$ and make a profit over short term trades, without purchasing penny stocks?