How to Trade Stocks and Options

It’s highly speculative and not every penny stock is a winner but it’s a fact that some penny stocks make explosive gains from 100, 200, to over 1000%, and if that’s not enticing, what is?

Yes, there is a way to win with penny stock trading, but first a brief definition and a caution.

The definition, sort of
Generally speaking, most of us consider a penny stock to be a low priced stock of a small company, often something we hear about because of its fund raising activities in connection with future speculative ventures. A penny stock is not likely to be listed on any of the major stock exchanges, although it could be, but penny stocks are often issued “over-the-counter” (OTC) by institutions known as the “Over-the-Counter Bulletin Board” (OTCBB) and the Pink Sheets.

But in reality, it appears that there is no precise definition of a penny stock. Certainly it is not limited to stocks that sell for pennies since many stocks that sell for up to five dollars are also considered to be in the same category. The Securities and Exchange Commission (SEC) takes the view that all shares trading for less than $5 are penny stocks. Nevertheless, to qualify in their own minds as a penny stock, most people would expect the stock price to be at less than one dollar. And some penny stocks trade at fractions of one-cent.

Whatever the situation, here and now we are interested in discussing penny stock trading and doing so in order to put up a small amount of speculative money to earn big returns. I believe that is the common view of many of the small speculators although I do believe myself that there are better and less risky ways to operate in the stock market when there is limited capital available. To be more specific, trading in options, but that is another story covered elsewhere on this website. For the penny stock advocates, claims are made that you can start with a few hundred dollars and turn that into thousands, losses are not too often mentioned.

The small trader does not have the time or the resources for adequate research
Successful speculation requires a certain amount of knowledge about how the stock market works in general and how particular stocks react to events of the day that are constantly changing. For listed securities there is an abundance of timely information available to the trader but that may not be the case for the penny stocks and it is much more difficult to conduct due diligence in order to properly assess the merits of any given stock issue.

The caution
Quite often, a significant amount of promotion accompanies penny stock issues in order to move the stock up in price and if you realize what is happening in such cases, you could well be in a position to realize a good profit. Stock promotion in this fashion is not illegal but is an essential part of raising money to fund operations with legitimate hopes that the company will benefit by the future works that require the funding. Although there is always the possibility that outsiders could manipulate the market for their own gains when stocks trade at very low prices.

A typical promotion piece would be a news release telling of good preliminary results on the company’s activities that show great promise and when completed, the final announcement of results could easily double and triple the value of the company and its shares.

How I would approach penny stock trading
Knowing that I don’t have the resources to properly research any of the thousands of penny stocks on the market, my best choice to start penny stock trading, I believe, is to subscribe to one of the many stock-tipping services that specialize in penny stocks. I would expect to pay about fifty dollars a month and would do so for at least a couple of months while I viewed the suggested Buys and Sells and also gained a deeper insight into the whole process. That’s a reasonable price to pay for a little learning, and who knows, I might also decide to put a few hundred dollars into one or two of the companies suggested – maybe even end up with the thousands they often claim can be made.

I have already checked out a few and can offer a few suggestions for your guidance. And before doing so, I assure you I have no affiliation or connection with any of the following and also I have no doubt by searching the internet you can easily find others providing similar information to help get started in penny stock trading.

1. For background information but not necessarily a lot of stock tips, I certainly liked the explanation of penny stocks given at the website http://www.buypennystocksguide.com/ . Under the title “Penny Stocks for Dummies – A Quick Synopsis” the author explains what you need to know before making commitments, he talks about the “pump and dump” scams and other things to be wary of and I see a list of other interesting articles of value to provide a good foundation to the process. I was also pleased to see references to the need to recognize stock chart patterns, something that we emphasize on this website.

2. A second website that does focus on stock tips is http://www.pennystockgeeks.net/. Their opening paragraph states:
“Make a killing in Penny Stocks. Invest as little as $300 dollars and we can help you grow it into $1,000′s of dollars. Subscribe as a VIP Gold Member today for just $49.95 US Per Month!”

3. Among the other hundreds of similar websites, you may also want to check out the following: http://www.thehotpennystocks.com/, http://www.cityequities.com/en/, and http://www.superstockhunter.com/.

In closing:
My final comment: If your capital is small and if you are uncertain about penny stock trading, read the posts on this website relating to options trading, another process that only requires a few hundred dollars. There are guidelines that show how to minimize risks and keep it simple.

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If you are an aspiring trader who want to know how to trade stocks, be warned, there is a lot to learn and the real world of stock trading is not kind to those who lack knowledge or make mistakes, in fact it can be very costly. So be prepared for a lot of reading, studying, and practicing, and even when you believe you are ready to join the throng and make your first trades, do so with caution, make sure you have a plan to follow and know how to manage risk.

The key part of managing risk is to limit the losses that you are inevitable going to have. All traders experience losing times, even the great Warren Buffet does, and his first rule of trading is “Don’t lose money.” And in case you haven’t heard it, his second rule is “Don’t forget the first rule.”

The would-be stock trader needs to open an account with a stockbroker. A stockbroker is the essential link between the trader and the stock exchanges where the buying and selling of stocks, bonds, ETF’s, options, futures, mutual funds, and other financial securities occurs.

In today’s online world, most trading activity takes place with online stockbrokers. It is not difficult to open an account with an online stockbroker but it will take a little time to become familiar with how to get around the trading platform interface, to learn how to place trades, get stock quotes, access stock charts and modify them to suit personal preferences. And there are other such things, including knowing what learning resources are available. To become proficient in getting around and accessing what you need to find will probably require the aid of a help desk or technical advisor from within the brokerage, but that in itself is an essential learning experience much like any computer involvement and it is relatively easy.

The basics of the basics in how to trade stocks
But adequate market knowledge in learning how to trade stocks is not something that can be accomplished by a few visits to the internet. It will take diligent study. There are books to read, and financial newspapers such as the Wall Street Journal or the Investor’s Business daily to read or at to least become familiar with in order to know what they have to offer, those and financial magazines should become reading material of habit over time especially when actually trading and gaining some success – which you will if you learn properly.

Internet resources
There are many informative videos and seminars available to watch and listen to, they are free and cover a wide range of stock market topics that can be absorbed gradually. In addition to instruction and training in specific stock trading topics, it is worthwhile to read more general material if sufficient time is available, to become familiar with the jargon and the lore of the stock market and trading of today and of the past, that can be a fascinating and diverting source of information. A good local public library should have many stock market related materials, books or videos, available.

While learning, check daily or every few days into Finance.yahoo.com or Marketwatch.com, those sites will bring you up to date with news of what is currently happening in the market plus there is plenty of other information of value to be found on them.

Stock charts, an important area of study
It is important to learn about stock charts and how to interpret patterns of stock movement that can readily be seen on a chart. Many recognizable stock patterns can provide fairly reliable signals upon which trading action can be based. Charts can depict clearly the underlying trends of the market and where areas of resistance or support are likely to occur. The trader frequently awaits those times to see when it can be confirmed that one of those confining levels is broken through, with the expectation of continued movement in the direction of the break out.

Virtual or Paper Trading
There are also resources for those learning how to trade stocks in which a form of virtual trading can be carried out, where real day-to-day trading actions to buy or sell can take place but without using real money. Using this method enables practice trading and implementation of much newly learned trading information such as trading strategies that identify what to trade and when to trade. From the results obtained, it may help determine whether the participant is ready for action in the market with real money. Many stockbrokers provide such facilities to their clients and there are many other sources on the internet, usually without charge. For more on this topic check out: Paper Trading.

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Some basic things you need to know

The objective of this site is to introduce the reader to some of the factors that can be considered in the process of making a decision to buy or sell a stock or a stock option when operating not as an investor but as a trader. To learn how to trade stocks it is necessary to become familiar with, and to gain an understanding of, the daily market-related information and the sources from which it is readily available, often represented graphically. That is the objective.

Trader or Investor, what is the difference?
It is a matter of emphasis, with the trader on stocks as the trading entity and the investor as a shareholder in a corporations. The major difference being that the trader wishes to make money from the movement of a stock, up or down, usually with a relatively short-term involvement and the investor most often takes a much more in-depth approach and stay with an investment for a longer amount of time.

The Trader
Successful stock trading depends on the ability to forecast what will probably happen regarding a stock and a stock market. And the forecasting process is derived from an interpretation of many events of the past with the expectation that there is a high probability that the patterns of the stock and the market in reaction to those repeated events in the past will be again repeated as new events occur. The past fluctuations of the market and individual stocks that have taken place until the present day can be represented graphically by a chart that displays a variety of attributes and activities. In this way, much significant information becomes available to those who know how to interpret the activity portrayed.

The trader is more affected by the activity that occurs as the market fluctuates in response to many day-to-day factors, reactions to related corporate news, general market conditions, supply and demand, short term news, global events and a myriad of other uncertainties as they play out over the short-term. The trader is more likely to depend on, at least to some degree, what has come to be known as “technical analysis”, much of which can be made from a review of charts of the stock’s past activities and charts of the market activity which show graphically the state of the market in which the stocks trade

. That can be complicated but there are some simple and basic approaches that can easily be learned with practice and patience. Frequently the trader will operate without the aid of a stockbroker and to do so, it is necessary to know how to trade stocks online, not difficult to do.

The Investor
The investor buys stocks, becomes a shareholder, in companies he or she believes have the likelihood of growth and profitability so that the shares of the company will gain in value as more investors are drawn to become shareholders in that company. The investor usually accepts the need to hold a position for much longer time periods than would be that of the trader.

The investor’s decisions are usually based on a review of the fundamental properties of a company. Those would include the company’s assets, its historical profitability and its current performance, and prospects for future profitability. Other aspects might be to review the balance sheet and company management to see how the profits and assets are managed and distributed, all of which takes time and experience.

In conclusion

So this site adopts the stance of the trader and will identify some basic indicators depicted on stock charts. Analysis of stock charts is not a science, there are so many variables and possibilities to be considered, but they do help focus attention on relevant factors so we will discuss some general guidelines that help interpret the data represented that relate to stocks and market performance.

We will test ourselves when we examine some individual stocks to see how well our earlier chart interpretations hold up, those that we choose for “pretend” trades for illustration purposes. That should be of value in meeting our objective to learn how to trade stocks.

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