Relativity Check: Penny Stocks Vs Options
How is trading penny stocks similar to and different from trading options?
News about “Penny Stocks Millionaires” keeps floating around social media. Typically, the talk is about starting off with very little money and how to develop the best penny stock picks over time. As fast as the markets move, the hot stock tips have often cooled by the time you read about them. You may have found that many who have done well with penny stocks, are also trading options. What is the connection? How is trading penny stocks similar to and different from trading options? While there are some similarities, there are more differences and considering those differences can help you form a well-rounded trading strategy. Before we get started, be aware that this article is not any kind of financial or investment advice. You should educate yourself in the risks involved in the stock market and consult with professional financial advisors before you make a stock trade.
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Similarities: Trading Penny Stocks – Trading Options
One of the reasons, if not the main reason, people who are just starting out in trading stocks are attracted to penny stock is because of the low initial capital investment. If the share price of a blue chip company is $300 and you can only afford ten shares, you won’t even be allowed to sit at the table. Because, as the name suggests, penny stocks share prices often are less than a dollar per share, you can handle tens or hundreds of shares with very little starting capital.
It turns out, some option opportunities may have the same low entry fee. It takes some hunting but there could be option opportunities as low as $50 to get started with. The difference from penny stocks is you can be involved with an options trade of a big board stock trading at hundreds of dollars per share. Again, it takes some looking. Other similarities are, both penny stocks and options can have low commission rates and both can be volatile (and of course risky) with strong gains or losses.
Differences: Trading Penny Stocks VS Trading Options
As stated before, differences outweigh the similarities. Most agree that one of the attractive qualities of penny stocks is their potential to change price quickly and dramatically but this doesn’t happen all the time, of course. With typically little volume, the price can move up and down (dramatically) in the space of 15 minutes whereas with options, you usually get a smoother, less spiky ride.
Another significant difference is the number of times you have the opportunity to act and make money. With penny stocks the possibilities can happen one after the next or you can watch your penny stock not move for days and days. With options, there are opportunities happening every day and you don’t have to wait for movement provided you know what stocks to watch.
And finally, one of the biggest differences is the ability to do equally well in both a bear or bull market if you are in options. With penny stocks you can do well in the straightforward buy-low-sell-high mode but it is rather complicated to sell penny stocks short.
Ready to Make Money Trading in Forex or Penny Stocks?
Hopefully this has been of some help. There is a whole world to explore beyond the few points made here. You are encouraged to learn more about trading penny stocks and options for yourself and maybe you’ll become the next penny stock (or options) millionaire.
Our recommendation is Fortrade Limited – a UK-based brokerage firm authorised and regulated by the Financial Conduct Authority (FCA), meaning your investments are protected at all times and you are you covered up to £50,000 per investment by the Financial Services Compensation Scheme (FSCS). Fortrade has also recently introduced a designated forex and stock trading app for iOS and Android devices.
Before you start forex or penny share trading, you should keep in mind one more thing: both penny stocks and forex have a high level of volatility (i.e., the degree of variation of a trading price, both up and down, tends to fluctuate frequently over a short period of time). Due to this fact, there’s a great potential to make a lot of money and to lose a lot of money when investing in them.
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