[mage lang="" source="flickr"]make money on penny stock[/mage]
How to profit from Penny Stocks?
I’ve got some extra money on my hands and I’m looking to invest.
My understand is the following:
>I put in $5000 into a penny stock costing $0.13, which would get me about 38,461 shares.
>I sell all my shares when the stock reaches $0.15
>I profit (38461 x 0.02) which would be $769 minus the broker fees.
I’ve seem quite a few penny stocks that fluctuate up and down quite a few times a day. I can make this trade about 5 times in the same day…
It’s not REALLY that simple is it?
Am i misunderstanding something about how this would play out?
What if the Volume is 71,829?
Imagine the difficulty Bill Gates would have if he wanted to sell all his shares in Microsoft, who would buy it. That’s the problem that penny stock investors face, insufficient liquidity. Suddenly you’re the big fat guy jumping off the diving board into a small pool, you’re going to splash an awful lot of the water out of the pool.
If you do trade in penny stocks than you will want to unload the stocks carefully over time with limit orders in an apparently random fashion so that nobody catches on that someone is unloading but of course the low liquidity means that it doesn’t take much before everyone starts holding out for lower prices and you no longer have any buyers.
The big institutional investors have liquidity issues with the big stocks too and they use computer algorithms to break their large trades into smaller chunks sold at pseudo random intervals and amounts to try and unload their position without anyone noticing, these large positions are called icebergs. There also run ping programs to try and detect when another institutional player is unloading and they also form alliances with other institutions to create dark pools of liquidity which are alternate trading exchanges with low trading costs and where the market depth of the order book are not made visible to the traders. These techniques are well researched though mostly trade secrets and are unlikely to work with penny stocks cause the penny stocks are left to the newbies and those that prey upon them.
The daily volume may be big but take a look at the graphs, they look like square waves ticking up and down, each vertical movement is a trade, if it went up, it was someone buying from a limit sell order (ask) sitting on the order book each tick down is someone selling to a limit buy order (bid) sitting on the order book, and the flat line between the vertical movements are where there’s no one trading at all. Then look at the order book, you’ll see the three to five highest bids and the three to five lowest asks in the form of a price x quantity. Those are the quantities you need to look at not the 71,829 listed as the daily volume.
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