Penny Stock Investments versus Trades - dummies

Penny Stock Investments versus Trades

By Peter Leeds

You should be aware that the terms investing and trading describe two different types of approaches. With penny stocks, the two approaches and likely their results, can be very different.

In fact, trading may be appropriate for certain types of people but not for others, while investing may prove quite profitable for some, but be not as effective for others. Think of it like trying to win a baseball game with numerous singles and bunts (trading), versus shooting for the home runs and grand slams (investing).

Investments in penny stocks

Investing generally involves looking over a longer term and getting involved with specific penny stocks because you believe in their business and their fundamentals, or you expect strong financial results to appear over time, which may help the share price go higher.

Investing is much less work, generally, than trading. Of course, investment research can be a seemingly endless task, but overall it should generally take up less time than trading. Investing involves researching a penny stock company (or companies) at your own pace, and on your own timeline, and then investing with the hope that the companies grow.

With investing, profits can be massive, as shareholders can often keep shares for the longer term and allow the prices to rise many times over, rather than cashing out for returns at the first 10 percent or 30 percent gain. Investing is a more appropriate approach for the majority of those getting involved with penny stocks.

Consider treating your penny stocks as investments (rather than trades) if you’re a newer and less-experienced investor. With investing, you can get involved with small companies before or as they get discovered and ride the share prices dramatically higher for gains of 2 times, 5 times, or even 20 times your money. A trader generally takes her profits at much lower levels.

Trading in penny stocks

Trading generally involves looking for short-term gains. Traders tend to ignore the fundamentals of the underlying companies and instead make buy and sell decisions based on technical indicators on the trading charts.

Trading generally requires more work, especially during the hours when the stock market is open. Traders attempt to make frequent, smaller gains, and to achieve these goals that make multiple buys and sells during the trading day.

A profitable trading strategy generally involves more trades than a profitable investment strategy. Due to the high volume and quick turnaround, trading enables shareholders to realize profits and losses more quickly. Some people find trading to be more exciting than investing. However, because trading requires more advanced analysis and trading tools, it is generally more appropriate for individuals with high levels of stock market experience.