Think Smart with Penny Stocks

Source: http://www.sophisticatededge.com

Are you considering investing in penny stocks with the hope of making lots of money? If you are you’re certainly not alone. But you should be aware that penny stocks – while being extremely cheap to buy per share – are far riskier than other more established and more expensive stocks.

Think smart when you consider investing

If you have money to invest and you want to invest it in the stock market, it makes sense to invest it in more than one company. This means you will be spreading the risk. If you pour everything into one company and the value of the stocks goes down, you’ll lose money. However if you spread your investment between, say, three or four companies, you stand a better chance of making more money.

This is a worthwhile point to note if you are going to invest in penny stocks. While spreading the risk is important in all investment situations, it is even more important when dealing in penny stocks.

What are the odds of making money with penny stocks?

Bear in mind that there is no such thing as a sure thing. While penny stocks are cheap and thus more appealing to those with lower investment budgets, they also represent a much higher area of risk.

Yes, you could make a lot of money if you pick the right penny stocks. But you could also lose a lot. We all want to find a company that is going to be a successful household name in the future. But the odds aren’t good.

Create a separate investment fund for penny stocks

If you understand the risks that come with investing in these particular stocks and you still want to go ahead with it, make sure you set aside a separate pool of money to devote to penny stocks. This should be cash that isn’t required for anything else. If you would be in financial trouble if you lost it, avoid investing in penny stocks.

Do your research – and don’t rely solely on the advice of others

If you take a look online you will find a wealth of websites and information regarding penny stocks. It seems that everyone has their own idea about which companies are the best ones to invest in.

But remember that this is your money you are investing. Do your own research and find all the information you can on the companies you are interested in buying penny shares for. You may do better to choose companies in a particular area of interest, such as green energy or manufacturing for example. If you know a lot about a particular area already you can use this knowledge to make sure you stand a better chance of picking shares that might be more successful.

Are penny shares right for you?

A lot of people randomly pick penny shares because they are cheap to buy and they hold the potential to soar in value. But for every one that does there are many more that fail, so bear this in mind.

How To Invest in Commodities

Investing in commodities like oil or gold has been popular for the last several years, because these assets have been rising in price.  Also, commodities are traditionally seen as a hedge against inflation (which many believe is coming), as well as serving a purpose in industrial uses.

However, investing in commodities has usually been tricky because it has usually been done contractually, or through the use of futures contracts.  The futures market is tough, as it involves margin and leverage, and has many seasoned players.

However, there are other ways to invest in commodities that may suit the regular investor.

Commodity ETFs

Over the past few years, many commodity ETFs have been created to help investors enter this market.  These ETFs are designed to track the underlying asset price, and do so through contracts behind the scenes.

As a result, they don’t perfectly follow the underlying price, but they come very close.  They also offer investors the relative safety of not having to directly invest in contracts themselves, but rather the ETF product.

If you want even more leverage, there are also leveraged ETFs that track the underlying commodity in multiples, such as 2x or 3x funds.  These funds ramp up returns, but also multiple losses significantly.

Commodity Producer Stocks

Instead of investing directly in the commodity itself, many investors choose to invest in the company that makes or extracts the commodity.  This can be a good play because these companies usually benefit as well from rising commodity prices.

However, since you’re not invested in the actual commodity, but a company, you usually gain more liquidity and safety.

Investing in the company can also be a better play if the company pays a dividend.  As such, you can receive a payment for ownership, where owning the commodity directly or through and ETF, you won’t receive one.

Investing in a producer that produces multiple commodities can also be a way to diversify across the sector, and help smooth any bumps in the road.

Getting Started With Options Trading

Trading options is an advanced market strategy, as it involves derivative investment products, semi-complicated math, and leverage.  However, because of the leverage, it can also provide lucrative returns.

If you are considering options trading, here are a few things you should know.

 

Getting Started

To start, remember that options can be both calls and puts.  If you are purchasing a call option, you are purchasing the right to buy a stock at a specific price.  If you are purchasing a put option, you are purchasing the right to sell a stock at a specific price.

Many people purchase call options because of the leverage.  For the same cost in dollars, you can purchase a lot more shares using options than buying the shares directly.  Take, for example, RY.  It currently trades around $50.00.  For $50, you can buy one share.  However, for the same $50, you can buy about 10 “in-the-money” options contracts, which would be equal to 1,000 shares if you exercised the options.  Furthermore, if the stock price is higher than the strike price plus the premium paid, the trade will be profitable.

On the opposite side, you can buy a put.  A put guarantees you the option to sell a security at a specific price.  People purchase put options when they believe that the stock’s price will decrease.  If the stock price is below the strike price by more than the option premium, the trade will be profitable.

 

More Advanced Options

As you become more comfortable with the basics of options trading, you can start with advanced trades.  These are known as spreads, and there are many different versions, each with its own purpose.  Spreads are trades that involve two or more options and are designed to limit risk or be used in certain market conditions.

Given their nature, they are more advanced, but as you become comfortable with trading options, these will prove to be very useful.