Which is Best for Your Investment Style: Penny Stocks or Options?

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To say starting out in investing is interesting hardly does the process justice.

The initial process of learning how to invest can be a lot of things: exciting, educational, uncertain, and SCARY.  People just beginning their sojourn into the trading world are entering into a realm they perhaps know nothing about, but, have heard plenty of rumors, which does not necessarily make the leap any easier.

Many new investors discover they do not know which stocks to invest in affordably.

Some novice investors go into it knowing they want to have a portfolio lined with the likes of Google, Netflix, and Apple, and then reality hits.  All of these premium stocks are far out of range for most people who have just put aside cash earmarked for investing.  Realizing their dream stock is out of reach, they get down to where they should have started: researching what they can afford.

Penny stocks are often the first option people consider when starting out buying stocks; trading options can be a smart strategy for new investors.

Once people figure out they do not have thousands of dollars to invest in just a few shares of stock, and then conducted their own research, they often consider penny stocks and options.  Both investments are reasonably inexpensive as traders can usually start with $1,000 or, possibly, less.

It is important to consider the costs in trading outside of the price of the stock in the form of fees and commissions.  When it comes to trading fees through a discount broker, the fees are usually about the same for both options and penny stocks.  If a trader’s account is under $25k, penny stocks and options are restricted by the pattern day trader rule, which limits them to only three “day trades” a week.

Trading options edges out penny stocks when it comes to the number of trading opportunities available.

A penny stock can go weeks, even months at a time with very small or no movement in their value.

The truth is, it can be difficult to even find a penny stock appreciating and setting up for a trade.  This is because, by nature, the stock penny market simply does not have much trader activity, meaning it is illiquid.  Because there is not a generous and consistent number of penny stocks, traders buy and sell between each other to create volume.

Conversely, options are based on exchange-traded funds (ETFs) and other big board stocks which means there is a steady and, usually, a considerable amount of volume each and every day.  Options make it far easier to discover opportunities of stocks yielding profits.

Trading options is more like buying stocks, so, they are usually more stable than penny stocks.

A penny stock can be the next big thing, or, more often, not.

Ideally, traders like to be in situations where as many variables as possible remain unchanged.  With penny stocks, this will not be the case.  Because they tend to be stock from new companies, not as “tried and true” as bigger stock, they are subject to just about every bump in the road.  Investors really trade at the mercy of any negative announcements or decisions made by penny stock company management and bad press usually ruins whatever position the investor is holding, leaving them out to dry.

Options, as earlier noted, are based on big board stock which are large companies with consistent records helmed by a board of directors and very well informed management teams.  Large big board companies rarely have huge upheavals in management so investors can rely on these companies running well and reducing the chances of investors losing everything.

Options trading tends to have much more fluid trading volume while penny stocks have far fewer shares available for trade.

Often penny stock traders look at their technical charts and see their stock is bouncing up and down making overall the chart appear choppy.  Again, this is due to the variable and limited amount of available volume shares for trade.  Penny stocks are plagued by uncertain technical indicators used by traders attempting to assess their stock.

Options have a much higher trading volume because they are based on the big board stocks.  If one were to compare a penny stock and a big board stock on a 5 minute timescale, they would see the penny stock move up and down, not really resembling a chart at all, while the big board stock would show a much more fluid trading pattern.  Because options are more reliable and fluid, they are far easier to discover chart patterns and trends which allows investors to make informed decisions.

Trading options has the advantage over buying penny stocks when it comes to selling.

Prosperous trading is twofold: there is buying and selling.  Anyone can buy a stock, but, then they also have to consider how easy it will be to sell their shares.  Again, the issue of volume comes in to play when dealing with selling shares.  Penny stocks have a small amount of volume making it sometimes extremely difficult to find a buyer for unwanted shares, which can be an enormous problem for someone with a huge amount of shares.

With options having higher volume, there is usually little difficulty in finding a buyer for unwanted shares, which makes for a very efficient market.

Trading options gives investors more flexibility whereas penny stocks are more of a gamble.

Penny stocks are limited to simply going long in the stock.  Although it can be difficult to find the right broker, one could short a penny stock, but, the fees associated with the sale would be enormous due to the high risk involved.  Summing it up, investors can really only make money on penny stocks when the stock price increases.

Options offer 100 percent flexibility with the way they are structured.  Whether prices are up or down, there are still opportunities for money to be made.  To top it off, more advanced trading options could land a profit even if the stock lays flat.

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