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Best trading method for me?
Ok so I am fairly new to trading stocks, due to money constraints I only trade penny stocks, but I have a career, an office job, 40 hours a week, so I’m looking for a penny stock trading style which I can manage while working, I was interested in scalping but that’s a full time job. I can really only afford to trade OTC and PINK, as I don’t have enough money to reap big gains in the NYSE, NASDAQ or TSX. I’m open to very short to some what long trades (Ideally in and out in the same day, but I can wait a week or two in a stock) is swing trading what fits me best?
Penny stocks are probably the worse possible option for you. If you can’t afford a stock in a reliable company then you can invest in a derivative of that stock such as an option or warrant. An option is a contract giving you the right to purchase the stock at a set price anytime before the expiration of the stock, a warrant is a similar contract but issued by the company itself instead of by a third party. Because of this right to purchase at a set price, the option tends to trade at the value of the stock minus the set price (strike price) stipulated in the option so the price of the option is always less than that of the stock and sometimes even pennies if the strike price is near to or greater than the current stock price even though the stock may still have a substantial price. However as long as the stock price is greater than the option’s strike price, the price of the option tends to have the same general price movements as the stock, if the stock goes up a $1, the option tends to go up by a $1 so the price movements present a greater percentage of your investment. There are some effects related to how close the option is to expiration as the closer it is to expiration there is less speculative value as there would be less time for the stock to appreciate so an option whose strike price is greater than or near that of the current stock price may not go up with the stock price if the option is close to expiration. Unlike penny stocks, when an option becomes worthless i.e.: the stock price is below the strike price, it still has some speculative value and doesn’t disappear unless it expires.
Of course, the stock market where you pay a commission to buy and a commission to sell is a costly one for people without a lot of money to invest and it’s difficult to overcome that overhead of transaction. Frequent trading by swing trading or day trading will only increase the overhead and make it harder to make any money, with limited funds you have to have a long term accumulate strategy in stocks. Mathematically, you’re better off with sport betting on a possibly illegal online gambling website, there the cost of entry into the market is lower and the probabilities and payout though worse are easier to assess.
Keep in mind that the best investment is perhaps no investment at all. How many people lamented not having the money to take advantage of the bargain prices after the price collapse? If you keep half your portfolio in cash or bonds and the other half invested then when your investments depreciate, you simply buy more till it’s 50/50 again thereby taking advantage of the downturn; if it goes up, you sell till you’re at 50/50 again thereby buying low, selling high. The optimal proportion of your portfolio to invest can actually be calculated by the Kelly Criterion (an Engineering equation from Bell Labs) but the equation is simplified for a binary outcome and requires that you know the probability and the net profit to investment ratio, however the result is that cash is an investment too and you’re better off having too much in cash/bonds then not enough. Of course, you can’t think of the cash in your portfolio as being available for anything other than investing, indeed none of that value in your portfolio should ever be drawn upon except in the most dire of emergencies and we’re talking life and death, unless your kid is on death row, don’t withdraw anything from your savings to bail him out of jail, he’s not going to die there and he’ll be fed.
Oh, and that company 401k, make sure you don’t select the ultra-aggressive portfolio which is fully invested in growth stocks, it has no ability to withstand a downturn and mathematically results in either a loss or no gain in the long run. The safest choice is the portfolio with 50% cash and bonds but you can probably gamble with a little less cash/bonds in exchange for possibly more growth. The conservative choice where it’s almost all cash and bonds, only makes sense if you’re happy with what you’ve accrued, it will result in net growth but only just.
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