Penny stocks vs Cryptocurrencies
It is a myth that only the wealthy earn money on stocks. Many investors with limited funds invest in penny stocks, which are generally not traded on major stock exchanges, but rather over the counter (OTC), and priced under $5.00 per share. The lower price means that an investor with less capital can purchase shares, and, if he reads the market correctly, he can conceivably see a very healthy return on his minimal investment when the stocks “take off.”
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Since the introduction of Bitcoin in 2009, and subsequent cryptocurrencies (also known as digital, or virtual currencies), many investors have seen similarities between investing in penny stock and in cryptocurrencies. While there is a commonality between the two, there are also important differences.
When a cryptocurrency is launched, founders are interested in getting the currency into (virtual) circulation, so they pre-sell a certain amount of units to investors, either in exchange for an already existing digital currency, or for a fiat currency, usually the U.S. dollar. Most cryptocurrencies are valued somewhere between $3-4 per unit in the early months of their existence, similar to the price of penny stocks.
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.
An additional aspect of the speculative nature of cryptocurrency is that the market is virtually flooded with them – over 1,100 digital currencies exist today. The more saturated the market is with virtual currencies, the harder it is for each one to gain a foothold. Only a handful of cryptocurrencies on the market have successfully turned a significant profit, for either their developers or their investors.
One difference between the two is actually based upon a similarity. Neither penny stocks nor cryptocurrencies are regulated. For penny stocks, being traded over the counter means that they are not under the auspices of a regulated and federally-monitored stock exchange. Cryptocurrencies are designed to be decentralized, not under the control of a central bank.
With penny stocks, however, this lack of regulation is riskier, because they are more susceptible to fraud and scams. Cryptocurrencies, on the other hand, use blockchain technology, which is a public ledger. The more that all records, accounts and transactions are public, the less chance of fraudulent activity. To date, no major cryptocurrency on the market has been hacked, so the lack of regulation is less risky than that of penny stocks.
Both penny stocks and cryptocurrencies can be invested in with a relatively low amount of capital. Both hold potential for high yield, and both are highly speculative.
Many traders prefer trading in the safer environment of CFDs (Contracts for Difference), which involves investing in price movements. A CFD trader who believes that an asset price will rise, takes a “long” position, which means “buying” without actually owning it. If the price rises, he sells his position and profits on the difference. If the price falls, he either waits for it to rise again, or sells before it drops further and he loses more. Similarly, if he believes the price will drop, with a “short” position, he would “sell” the CFD, and buy it back when the rate has dropped.
For trading CFDs, Fortrade.com, provides an excellent range of fiat and digital currency CFDs, as well as on a large selection of stocks, commodities and indices. Their full list of CFD’s is here.
Of course, all trading carries an amount of risk, and in order to trade successfully, it is important to study market trends, and to conduct a fundamental and technical analysis with which you may develop an efficient and successful trading strategy.
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