Penny Stocks For Dummies

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Whats the best way to learn how to play the stock market?

I want to know the difference between penny stocks, and big money stocks. I wanna know the difference between all the companies, and I want to be able to confidently look at a stock and predict its value. I want to know HOW to buy!
I also want to know the different ways to buy. Whats a hedge? whats a bond? whats a margin?
I’ve heard all these terms, but I dont know much of anything.
I’ve bought stock market for dummies, and even THAT book starts out with the assumption that you know a little bit to begin with.
I just wish there was a guide that was absolutely step by step.
Can someone help me and direct me to the best place to learn the stock market?

You have asked a lot of questions. Let me try to answer some of them for you.

1. Penny stocks are basically stocks with a market price less than $1. They are smaller companies, often in the resources industry, which are hoping to “strike it rich” by a new discovery or similar. However, you can make a good profits in terms of a percentage on risk, because a price move from say, 20 cents to 25 cents is a 25 percent profit. On a $20 stock you would need a $5 move to achieve the same result. But penny stocks also carry greater risk – and a move downwards can hurt you as much as a move upwards.

2. Big money stocks – not sure what you have in mind here, but I’m assuming you may be referring to “blue chip” stocks. These would be well established companies such as those that make up the Dow Jones index – 30 larger companies whose daily stock price is averaged to form the index value.
If you are only trading shares on these stocks, they are a good INVESTMENT for the long term, but if you want to TRADE on a short term basis to make cash flow, it’s not so simple. You would either need a lot of capital to make an income-like cash flow, OR start using derivatives such as options. Option Trading can be a very safe and effective way to replace your income using the big money stocks.

3. A hedge is where you offset the risk on one investment by another investment which will make the same amount of profit, should your original investment lose money. For example, you might buy XYZ company at $35 per share. You may have done this purely to receive dividend income but you want to protect it from capital loss. So you sell a futures contract at $35 or sell $35 ‘contracts for difference’ (CFDs) to the market. If XYZ falls to $28 then your “sold” futures contract makes $7 profit to offset the $7 loss on your shares. Think of it as a form of insurance. You can do the same with options.

4. A margin is the amount a broker or market maker will lend you, to make up the difference between the total value of your share investment and the amount you invest. Let’s say your margin is 50 percent. This means the finance company will lend you “the same again” so that you can buy twice as many shares as if you only used your own money. The finance company will use the shares you were able to buy as collateral for the loan. Because of this security, you can get one of these types of loans even if you’re bankrupt. But if your share price drops below a certain amount so that your collateral is at risk, you may get a “margin call” from your broker.

5. One of the best ways to determine future price action for a stock is to learn how to read charts. You will observe reliable price patterns which will enable you to make good trading decisions. If you combine this knowledge with what you can do with options, you can make some really good money, because options have leverage, which basically means you can increase your profits tenfold for the same amount of risk.

Hope this helps.

Penny stocks for dummies

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