There are several strategies for investing in the stock market. This is because the stock market has several simultaneous, yet often contradictory, things that can be counted on. One trend is that the stock market increases in value over the long-term. Regardless of ups and downs, zooming out far enough and getting a big picture look at the market will reveal a general upward swing. Even disasters such as the Great Depression and the recession of the late 2000s are statistically insignificant when considering the entire history of the stock market.
A second dependable quality of the stock market is volatility. While over the long-term, the stock market has been and is on a continuous upswing, zooming in enough will reveal up and down fluctuations. Even stocks that are very sharply rising over the course of a week, or month or few months do not do so smoothly. Over the course of a day, every singly stock on the market goes up and down several times. This volatility can be harnessed by investors who only hold a stock for a day or two, or even a few hours at most.
Stocks
Money can be made in the stock market by taking advantage of either of these two general tendencies. The buy-and-hold strategy, also called "going long" involves just that - buying a stock and waiting years or decades to sell it. Because the market always goes up, an ETF that tracks the market will always eventually increase in value. However, this strategy means that decades like the 2000s can be a major setback. Anyone who bought into the market in 2000 was not anywhere ahead of someone who bought into it in 2010. So, this strategy is safe, but may take a long time to see guaranteed gains.
A second strategy is to hold a stock for only a short period of time, and then sell it in hopes that it will drop. Since stocks do go up and down, this can be a powerful way to make money, if one times the purchases and sales correctly. Unfortunately, timing the market can be difficult to do correctly. Successful short-term trading takes a lot of effort, time and research. So, it can potentially be much more lucrative than a long strategy, but it requires more input from the investor, and carries more risk of financial disaster.
For investors that have a good handle on short-term trading, advanced strategies can leverage money to maximize gains even further, albeit with increased risk. These strategies include short selling, options trading, and penny stock trading.
Short sales are a way to make money from a stock that drops in price. In a traditional buy-and-hold strategy, money is made by owning a stock that increases in price over time. This is essentially the same for a shorter term day trader - while the stock might be bought and sold several times throughout the day, money is made by buying low and selling high.
With short sales, an investor sells a stock before buying it. Imagine renting a car and then selling that car to a third party. After the car depreciates a bit, buy the car back at a lower price and return it to the rental agency. The liquidity of stocks and lack of need for insurance, title and other legal protections makes this a feasible option for stocks. The danger is that while a car is almost guaranteed to drop in value (unless the buyer makes major modifications or restorations), stocks might rise or drop. If the car were to somehow rise in price, you would still be obligated to buy it back and return it to the rental agency. In the same way, stocks that are shorted must still be bought back to cover, even if their value increases.
Options trading is a way to multiply the power of owned funds. Instead of buying a stock with X amount of money, you'd buy the option to buy that stock at X price for X/20 amount of money. You could do this twenty times, using up your X amount of money. If the stock goes up, you profit twenty times as much as you would have if you had bought the stock at face value. (Technically you have to subtract the cost of the option from the net profit). If the stock drops, you only lose the price of the options, and not the full price of the stock.
Penny stocks are defined as any stocks that typically trade below the five-dollar mark, and might have a value of only a fraction of a penny. These stocks are also sometimes called micro-cap stocks, although the terms refer to different aspects of the market. While "micro-cap" refers to the market capitalization, and "penny stock" refers to the price of the stock itself, the most of one category often falls into the other, so the terms are often used interchangeably.
Penny stocks can sometimes be attractive to investors with a pump-and-dump strategy. The stocks have a low price, and a low level of regulation compared to higher cap stocks. Thus, cutthroat investors might buy a huge amount of one stock, which creates artificial demand, causing the price to rise far past the stock's actual value. Once enough other investors have bought in at the inflated price, the original investor will dump the stocks, making a profit. But, the sudden surge of his stocks coming back onto the market lowers the price, by increasing supply.
But penny stocks can also be a powerful money-making property. With proper research, one can avoid penny stocks that are overvalued, and purchase shares of companies that have a legitimate potential to increase in value. Stocks in the petroleum, technology and medical fields are currently poised to potentially increase in value - petroleum and technology because of the advancing of economies such as China and India, and medical because of the recent breakthroughs in science, such as stem cell research.
Multiplying Capital: Short Selling, Options, Penny Stocks
For more information about penny stocks and the precautions you should take when purchasing them, check out PennyStockResearch.com. This resource is purely informational and is not affiliated with brokers for penny stocks or other securities.
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