High Volatility Investments

Penny stocks and options are volatile investments that attract both the entrepreneur and investor in the long term, due to the small amount of capital required to make substantial gains compared with less volatile higher priced stocks. A long term investor buys a stock believing that a company of the value will increase over time, the stock price along with it. When he buys an option is usually to reduce the risk of having the underlying shares. In the short term trader looks at things a little differently. Typically, a merchant demand for large percentage price movement for a short period of time. Large proportion of short-term price movements can be found both in certain options and penny stocks.

Penny Stocks are often defined as stock prices below $ 5. It is often implied, but not necessarily the case, which are also penny stocks micro caps capitalizations of less than about $ 250 million. Penny stocks can be found across the full range of capitalizations of micro caps for large cap stocks. For example, Sun Microsystems (NASDAQ: SUNW) met the definition of a penny stock for much of 2004, trading between $ 4 and $ 5. At the end of 2004, trading between $ 5 and $ 6 per share, its capitalization was more than $ 18 billion. The price of a large cap $ 18 billion stock would rarely be expected to pass by a large amount over a short period of time. The highest daily percentage price gainers, say 50% or more are typically actions that were initiated from $ 5 or less. But they are typically micro caps.

As a group of micro cap penny stocks are avoided by the big funds because prices are easily affected by large orders for the purchase and sale and capitalizations are too small to affect a large bottom of the bottom line. Buying more than 10% of a company held brings some insider responsibilities. Large funds have to wait until the stock prices rise above typically around $ 20 before they can become seriously involved without moving prices and still have price movement impact its financial results. The small investor has a clear advantage over large fund managers when he takes a position early in a good micro cap penny stock.

Short term options are most appropriate when the underlying shares have a higher price, say above $ 50. While it is more likely that a program of micro-cap penny stocks will gain 50% in a single day is not for a higher price stock, the typical 5 or 10 for a leverage that options provide necessary only for a higher price stock to move 5% to see a gain of 50% the corresponding option price. There are several additional considerations involved in choosing an option. Not the least of these is the market environment. When properly chosen, options prices higher inventories provide the same large daily price movements of penny stocks. Low priced stocks need to go through a larger percentage, in order to see a similar percentage move in the corresponding option. They are only likely to do so if they are micro cap penny stocks.

James Andrews publishes the Wiser Stocks and Options Trader Newsletter. You can read about choosing penny stocks and options in http://www.wisertrader.com

2004 Permission is granted to reproduce this article, as this paragraph is included intact. sharla melodee



Bookmark it: