Everyone dreams of hitting it big in the stock market. It is the idea that a penny stock can reach triple-digit numbers or that options trading can lead you to be a millionaire. But when just starting out you’ll hear forex mentioned as well.
So which is better, starting with penny stocks or forex? Here’s a breakdown of the two.
Penny stocks are shares of a company that are usually trading for under $5 per share. These are small businesses that are looking to achieve extra capital by having you invest in them. This makes it a great opportunity for startups or those companies that have been around for a long time without making a claim for fame.
Penny stocks start just like any other stock, by creating an initial public offering (IPO). These stocks are typically only found on the electronic OTC Bulletin Board (OTCBB), where they do not have to meet the same expectations and regulations. Though there are companies that do trade on the New York Stock Exchange, this is not common.
The biggest pro of penny stocks is the chance for high returns. With stocks being so low in shares, it is easy to consider the upside in appreciation. These stocks may even “reach for the moon” where they hit astronomical heights for huge gains.
The other benefit is the ability to support small businesses. If you find a small company you truly believe in, then you can look to see if they have an IPO and help support them further. This can in turn help them have access to more capital and continue to grow.
Another big benefit of trading penny stocks is they are cheap. Finding a penny stock you believe in can be considered a safe stock because if you do not have to invest large sums of money into the IPO. It makes it a great way for new investors to start off.
One of the biggest issues with penny stocks is the volatility of them. This is often why they are only allowed to be traded on OTCBB. A week on the stock market can see gains in the double to triple-digit percentages and vice-versa for losses.
The other issue with keeping penny stocks is the lack of being able to sell them come time to get out. Because penny stocks will typically trade at lower volumes, investors will have a harder time selling their shares.
Another negative for penny stocks is the lack of information on small companies. These companies may provide little to no information to shareholders because, for them, it is not a priority. You may be throwing money into the wind in hopes the money finds you more money.
With little information on a company, this can easily lead to fraud. Fraud in the penny stock exchange is not uncommon and numerous individuals have set up false companies in favor of stealing money from individuals. Try and learn the most you can about a company before deciding to invest your money into it.
Forex, also known as the foreign exchange market is the act of trading foreign currency. While foreign is typically for tourism and commerce, individuals can get into trading between countries’ currencies for profit.
There is no set place to trade currencies either, meaning they too are left for over-the-counter (OTC) trading. The current trend for forex trading is the spot market. This is what is considered the equivalent to day trading, but with currencies.
The biggest pro of forex is the amount of volume that goes on with the system. There is no shortage of people trading currency at any given time, which makes it easier to sell a position whenever needed.
The forex market runs Monday through Friday, 24 hours a day. There is no opening and closing time like there is on the New York Stock Exchange, which opens at 9:30 am and closes at 4 pm. While there is after-hours trading, these options depend on the brokerage and are not always available to everyone.
Forex creates a great position to hedge your portfolio as well. Hedging is the process of protecting your positions from any unexpected and unwanted moves when it comes to the exchange rates. It is important to note that hedging is not meant to make money, but instead to mitigate risks that may negatively impact your portfolio.
Forex can be complicated to get into even with little upfront money. A person who has decided to trade currency needs to understand not just how the United States economy works, but also the country of the currency they have decided to trade. This makes it less appealing to those just starting off.
Forex also requires heavier watch times. This means you may have to pay attention throughout the day, every day to any world news that may sway your position one way or another. Since the forex is available at all times of the day, this can mean sleepless nights if you are not careful.
Brokerages tend to use a high amount of leverage when it comes to forex trading. Leveraging is a technical term for borrowing money to help your account when funds are not available. If you are not careful of how much you are leveraging in these accounts, it can quickly turn into an account you no longer even own.
The stock market is a tricky, but fruitful game. Everyone will have their pick on the best stock to buy in a moment or the best currency to trade. The goal is to understand what you’re willing to risk by trading and investing.
If you’re looking to start understanding penny stocks, look into our Live Trading Room. Here you will come together with a team of individuals who can make recommendations and show their secrets of the stock market.