There is an essential argument when it comes to all stocks; trading versus investing, and what is the better strategy? The answer to this question is not simple, and the truth is that neither method is empirically better than the other. What matters for the individual is that they deal with penny stocks that play to their strengths. For many, this means that they are at their best when they are doing background research into companies. For others, it means that they will do their best when they are following trends and analyzing patterns. For myself, I have made most of my money through trading stock, although I have had several investments pay off in the past. It is more work for me to make a dollar through investing than it is through trading, and that is perhaps the most important aspect of this debate. Both methods produce a profit, but the dollar to hour ratio is doing to be far different depending on the individual, not the method. That being said, there is an argument for both the main styles of making a profit through penny stocks. Reading the argument for each style, try and figure out what method you would gravitate towards. Your ability to succeed in either method is made from factors of time, resources, investment pool, family commitments, and more. By simply reading how each method works, you should be able to picture what fits more in line with your lifestyle.
An Argument for Investing in Penny Stocks
Investing in a penny stock is the opportunity to get in on the ground floor of a company. You have the ability to buy shares in a company for a very cheap price, and if you just hold onto those shares then you will get paid multiple times your base investment. This idea is at the heart of investing – make a long term bet on a company, and literally help them grow into something successful. This type of transaction makes a lot of sense for those that have a knack for researching a company. It is suited towards people that like to get into the nitty-gritty details of a company, like the basic product that they are producing, understanding the market for that product, being realistic about the manufacturing costs, and so on. The more information available to the investor, the more this method makes sense. It is not just important to be informed about the financials of a company, but an investor also needs to be aware of all liabilities that a company holds and even needs to know a bit about the key people running the company.
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This method of making a profit from penny stocks should only be practiced on the NYSE. It can also work on the OTCBB, but this is far riskier. For a long term investment, you will want the assurance that comes with trading stock on the NYSE – there is some degree of financial vetting and you can be assured that the documents you are reading about a company are accurate. This method should never be practiced on the pink sheets, as information is too inaccurate to make an accurate prediction about the future financial viability of a company.
The methods of investing that I suggest for this method buy and hold trading, and value trading. I will go into more detail in these more specific methods in the next chapter, but for now, know that each will have an investment period of around three months. The total amount that you should be investing in a company using these strategies needs to be fairly large. You want to have investments be around one thousand dollars, which can be fairly steep and limit your ability to invest in other companies. These methods are for those that have faith in a company and are betting on their ability to predict the future in the market. It almost resembles a science, and this is perhaps the largest argument for this style of investing. You are not so much as making a bet, as much as making an educated guess as to what companies will be successful. The initial cost of investment is very high, for penny stocks, but the potential profits through these methods are many multiples of your base investment. This is particularly true if a company reaches mainstream success, breaking out of a penny stock to become better known on a national level. This is extremely rare, but in these instances, an investor can make several hundreds of times their base investment.
