While penny stock trading and forex trading are both appealing potential investment arenas for investors with limited investment capital, they are likely to be most attractive to different types of investors.
Key Takeaways
- Both penny stocks and the forex market attract day traders looking to take advantage of price volatility and speculation.
- Penny stocks are ideal for people searching for a diamond in the rough that will produce a sizable price appreciation, percentage-wise.
- Forex markets are highly leveraged and allow day traders to profit off of even small moves in highly liquid markets.
The Basic Appeal of Penny Stocks and Forex Trading
Penny stocks and forex trading offer opportunities for aspiring investors who have limited investment capital. The opportunity is there, in either investment market, to take a relatively small amount of money and literally build a fortune within just the space of a few years. If nothing else, there is at least the opportunity to get started in investing with only a little bit of money. In contrast, regular stock or bond trading usually requires a significantly larger bankroll to invest and see substantial returns.
If an individual is working with an investment account of $50,000 or $100,000, then a potential 10% return represents a substantial sum of money. But for an individual who only has $500 to $1,000 to invest, a 10% return is not even enough to cover the cost of a new smartphone. Investing in regular stocks does not typically offer the explosive growth potential that exists for penny stocks, nor the high degree of leverage available in the forex market.
Penny Stocks: The Speculation Market
Penny stocks are a good fit for investors with limited funds, who are comfortable with speculative, high-risk investments and have both the time and the inclination to do all the necessary research that is required for successful penny stock trading.
Although penny stocks are typically defined as any stock trading at a share price under $5, and by that definition include many stocks traded on regular exchanges such as the Nasdaq, most people think of penny stocks as those very-low-priced stocks traded through the over-the-counter bulletin board, or OTCBB, or pink sheets markets.
The major difference between trading penny stocks and higher-priced stocks listed on regular trading exchanges is that successfully trading penny stocks requires significantly more effort to obtain reliable, up-to-date information about the companies in which to invest. Pink sheet traded stocks are not required to register with the Securities and Exchange Commission, or SEC, and are much less stringently regulated in terms of the public information they are required to provide. In addition, penny stocks are often touted with a lot of less-than-accurate information. Therefore, to be a good penny stock investor, an investor must be willing to spend the extra time and effort required to obtain good information to make good investment decisions.
Penny stock investors also have to be comfortable with the fact they are making high-risk, very speculative investments, most of which will probably not pay off.
Forex: The Leverage Market
The forex market is a completely different asset class from stocks, and therefore is more appropriate for investors who, like futures market traders, prefer investing in basic assets such as currencies, rather than trying to pick individual stocks or funds.
The other major appeal of forex trading is the tremendous leverage offered. Investors are typically required to put up as little as 1% of the total value of a forex contract in margin. The forex market has exploded in popularity primarily due to this fact; it offers the opportunity for an investor to get started in trading with as little as a couple of hundred dollars and have a reasonable opportunity to make substantial returns. A forex trader can make a $100 investment and see a 50% profit 10 minutes later. There are simply very few other investment markets that offer a similar opportunity to make such significant returns, so quickly, with a small amount of investment capital.
Unlike penny stocks, the forex market is tightly regulated, much like major stock exchanges, and information regarding the various currencies traded is freely and easily available. While penny stocks are more appealing to investors who enjoy doing extensive research, forex trading is more appropriate for investors who prefer trading that occurs on regular exchanges, is less speculative in nature and offers the highest degree of leverage available.
