What is Penny Stock Investing vs. Trading?

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I’ve often found that many investors speak of penny stock investing as if it were the same as penny stock trading. This is actually a common misconception, not just with penny stocks but with all other types of stocks. Trading and investing are two completely different methodologies for building wealth, each with their own advantages. Thus, it’s important to understand the difference between the two and then decide whether you are penny stock investor or trader.

Penny Stock Trading

Trading penny stocks is probably the most popular of the two models, not because it’s any more profitable long term but because you can make a lot of money in a short period of time. The problem is of course that it’s a two-edged sword in that you can equally lose a lot of money very quickly. Penny stock trading methodologies include intra-day trading, swing trading, momentum trading, technical trading, even fundamental trading. Each of these techniques have their own pros and cons but the point is that they are all executed either within the same day (i.e. day trading) or over the course of a few days or weeks. Trading penny stocks is not for the weak of heart – you have to continually monitor your trades via level 2 quotes and be prepared to get out at a moments notice.

Penny Stock Investing

Investing in penny stocks is a completely different animal altogether. After searching for some good penny stocks with greater than average growth potential, you buy and hold them for months, even years at time. It may seem risky, even absurd to some traders to hold penny stocks for that long but that is probably because they are traders, not investors. Remember, just because a stock trades on the pink sheets or has very low capitalization, it doesn’t automatically mean it’s junk. There are plenty of penny stock investment opportunities out there with potential for high gains over the long term, you just have to know how to find them.

How to Invest in Penny Stocks

So how do you invest in penny stocks? Firstly, read my post on the finding the best penny stocks to buy in order to better understand what makes a quality penny stock. Secondly, consider consulting a good penny stock broker, penny stock analyst, or even subscribe to a reputable penny stock newsletter. Lastly, only buy companies you can understand. What I mean by this is if you work in the mining sector you probably have a pretty good idea of what to look for in an up-and-coming mining or exploration company but if you’re in the food industry, don’t even pretend to guess which gold penny stocks look promising. Instead, focus on what you know and you’ll already have a built-in advantage.

Consider a Penny Stock Fund

Another good option for those of you who want to invest in penny stocks but have very little expertise in finding good penny stocks to watch, is to consider a good penny stock mutual fund or ETF. An ETF stands for Exchange Traded Fund; they are essentially funds that closely follow a particular index or sector with much lower expense ratios than managed mutual funds. The advantage of investing in something like the Russell Microcap Index ETF (IWC on the NYSE) is that you can add it into your portfolio and leave it for the long term without having to frequently monitor it. This way you get the excellent growth potential from emerging penny stocks without the excessive risk and maintenance.

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1 comment so far ↓

#1 James on 10.31.10 at 1:00 pm

Good article. Thank you for some sound advice.

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