Penny Stocks vs Forex Trading: Which is Best For New Traders?

Penny Stocks vs Forex Trading: Which is Best For New Traders?

Penny Stocks vs Forex Trading: Which is Best For New Traders? 1024 546 Steven Dux

Penny Stocks VS Forex Trading… which is the right method for YOU?

I suppose that depends on you, your past, your skillset, and what you plan to achieve in the future. Yet the real answer is often an obvious one once you dive a little deeper into the differences between the too. Both Penny Stocks and Forex Trading are the kinds of investment opportunities that catch the attention of beginners even though they are very different from one another.

Today, we will go through these differences so you finally know the right answer for YOU! Since the time you started learning about day trading, I am sure you have come across a ton of literature on both Penny Stocks vs Forex Trading, and maybe you’re still unsure which one to go for. Are you better off trading the stock market or the forex market? It’s a question I come across a lot.

Being a mentor to beginners is a huge part of my daily life and most of them want to know if they should go for forex or penny stocks.

Before we get into that,

I would like to remind you to go through my Investing for Beginners series, if you haven’t already, as I’ve put together a huge library of information that’s useful for your trading career, no matter which path you choose.

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Penny Stocks VS Forex Trading... What is the best way to trade?

When I first started, I also contemplated between Forex and Penny Stocks Trading. According to books and the internet, these seemed to be the most popular and coveted choices. I learned a lot of things in my initial research, but because there is so much information out there, I found it all overwhelming. When I first started to study the markets, still in college, I needed to make a choice. I needed to know what kind of trader I would be.

My research led me to the conclusion that Penny Stocks are a way better option than Forex Trading for new traders, and in this article, I’ll explain why. It is noteworthy to mention that both methods of trading do promise big profits with relatively small investments, and both include considerable risk. But one does outperform the other, and in a few minutes, you’ll understand why.

What are

Penny Stocks?

Stocks with much smaller market caps than the Apples and Amazons of the world.

The Securities Exchange Commission defines Penny Stocks as any security trading below $5. Investing in shares of a stock means you’re essentially owning a small percentage stake of a company. For example, if you invest in stocks of Apple you’re buying a small percentage of its market cap of $2 trillion. The market cap refers to the total value of a company’s outstanding shares. It tells us the size of the company and how flush it is with cash. Penny stocks belong to companies with a much smaller market cap than a company like Apple. Usually a penny stock involves companies with a market cap of less than $300 million, which ends up being companies that are traded for under $5 on different stock exchanges.

The stock exchange I recommend using is the Nasdaq because stocks on the OTCBB and the Pink Sheets usually have issues...

…when it comes to fulfilling orders in a timely manner or with enough liquidity, meaning you can get stuck in your position, even if it looks like you could come out ahead. Penny Stocks work well for investors that have a limited amount of money to invest, but still have the ability (and freedom) to take some risks. They are inexpensive and have the potential to produce big returns which is what makes them so popular (especially to new traders). There is a subcategory of penny stocks called small-cap penny stocks. Small-cap penny stocks trade over $1 are required to be listed on the Nasdaq and to file their financial statements. They’re required to keep their investors in the loop. 

The stocks I recommend are usually above what a typical “penny” stock is

They will trade for around $2-$10 a share. Knowing this is essential as it helps determine the power of your risk management. The name of the game in Penny Stocks centers around which stocks you choose, as well as following the right strategies that can help you achieve great success. To put it very simply, success in Penny Stocks is about knowing how to select the right stock based off of examining patterns, then implementing strategies that actually work. Make sure to incorporate proper risk management into your account through stop orders so you take minimal losses.

Blue Chip Stocks

A question I’m often asked is why I don’t just trade blue chip stocks like Apple or Amazon. Why Penny Stocks? Why day trading? 

Well, Blue Chip Stocks are definitely a safer option, but you also can’t swing big profits in the same way you do with penny stocks.  For penny stocks, you can find trades that can return anywhere from 50% to 100%+ returns on a singular trade. Frankly, when I started, I didn’t have enough capital for blue chips. You need at least $100,000 to properly get into those markets and they only yield a low average yearly return of around 15-20% per year, which didn’t fit into my financial goals when I was in college and figuring out a way to make it here in America. And now that I have so much experience in penny stocks, I would rather use my time to maximize my profits.

My strategies have worked so effectively, that they have become second nature to me, even as the market adjusts. The biggest advantage of Penny Stocks is that you can turn your portfolio into a six figure account, all within a few short years (sometimes sooner, based off student’s results). In the world of Blue Chip stocks, a lot of the trading is done by algorithmic traders and large hedge funds. It makes getting into the field difficult for a beginner to truly realize profits. However, the Penny Stock market provides a much more level playing field, as long as you know the ins and outs of what to do, which is why having the right mentor is so important.

Hopping into the Penny Stock field without knowing what to do can leave you facing a lot of risks to your account, and you could end up blowing your account.

What is

Forex Trading?

Forex, or the Foreign Exchange, is the exchange of global currencies, and the market for trading these is called the Forex Market.

It is one of the most active markets out there where traders exchange currency for profits. Currencies being converted every day tends to make the price movements of certain currencies pretty volatile. Exchange rates can vary constantly. Nowadays, because of online forex trading, almost anyone can do this type of trading from the comfort of your home (without having to go to a foreign exchange agency). This is what attracts traders as the chances of profits are high. BUT… as I mentioned earlier, there is a high risk attached to this!

Forex is considered the most liquid market in the world with a large trading volume. Trillions of dollars get exchanged every day. Investors usually borrow money from brokers to invest in currency. This is known as leverage. By taking leverage, investors are able to trade large values in currency. But it also amplifies risk to a great extent. If the currency you’re trading moves in the opposite direction of your prediction, your leverage adds to your losses, which can wipe out your brand new account in a matter of days.

A number of risks involved

in Forex Trading.

A number of risks are involved in Forex Trading and these can lead to huge losses if you’re not careful or aren’t sure what to look out for. While there are many risks in Forex trading overall, let’s talk about some of the big ones that affect individual traders.

1.

Exchange rate risk

Exchange Rate Risk arises because of the disparities in currency values. Worldwide demand and supply of currency are volatile in nature and therefore every currency is prone to price changes. This risk can become considerably huge with currency value volatility and fluctuations. Let’s say you buy a utility from Canada at 100 Canadian Dollars… today, you pay approximately 77 USD for it, but tomorrow if the exchange rate changes then you might have to pay much more. This unpredictability is what leads to Exchange Rate Risk. Companies that have operations in multiple countries are subject to exchange rate risk all the time.

Paying attention to all these factors for each country’s currency becomes problematic and there are just too many moving parts to take into consideration.

You have so many factors to look into when it comes to currency.

  • How well a country is doing financially
  • How their businesses are performing
  • What their Gross Domestic Product is like
  • How the people in the country are living
  • What their political systems are like and if they are facing changes
  • How they are doing business internationally and with what countries
  • How much debt a country is carrying
  • How their manufacturing and agriculture businesses perform

2.

Leverage risk

In simple terms, leverage risk focuses on borrowed funds. One of the reasons people choose Forex Trading is because you can borrow more money than you can from a day trading brokerage for penny stocks. Forex Traders often use leverage to increase profit potential. i.e. they borrow money from their broker. But the catch is, this same leverage can amplify losses just as easily as it can increase profits.

The greater the leverage, the higher the risk. Let’s say, for every dollar you invest you can put in $50 of leveraged funds, and you buy a thousand units of currency… now your risk is not just $1,000, but also the $50,000 you used as leverage.

When you carry that much leverage, especially when charting unknown waters, you can potentially run the risk of losing all of the money you invest in a matter of days. While the upside is great, if there is one, you will find less risk when it comes to penny stocks, which makes it a better choice. The reason penny stocks is a better choice is because day trading successfully is a math problem that is tied into human psychology. Once you understand the fundamental elements of how the stock market works by working with a mentor, you can trade successfully without having to pay attention to all the moving parts, because the entire stock market just becomes a matter of reading graphs and understanding how they are designed to maneuver.

3.

Exchange rate risk

The Risk of Ruin when it comes to Forex is extremely high. There have been so many people who have reached a point where they have to quit trading altogether, just from being wiped out in the Forex markets. People get excited, then don’t know how to manage their emotions, so they start going on a losing spree. And when you enter into a losing spree on through Forex, chances are, new traders have to give up what they’re doing altogether. Even if your long-term plans would have worked out eventually, sometimes you simply cannot take the short term losses that come with Forex.  

Sometimes… you just don’t have enough to sustain your position! Traders with not enough capital may experience these losses. (this is why Penny Stocks trading is what’s better for traders with smaller capital). Apart from these, there are many more types of risks that affect Forex trading and a majority of them affect banks rather than individuals, but these risks I mentioned affect enough traders for it to be a not so great option.

So, how does this compare to Penny Stocks and Day Trading?

Why are penny stocks risky?

Penny Stocks are considered pretty risky too, and there are a few reasons why.

Success while trading in Penny Stocks depends quite a lot on the company you choose to trade with. Sometimes, a Penny Stock company could be one that’s about to go bankrupt. At other times, it could be a super new company with absolutely no track record. Most of these companies are on the OTCBB and the Pink Sheets.

It can be tricky to find out all details about a company before you decide to invest in them… But to hedge the risk, I usually advise my students to only invest in stocks on the Nasdaq. So Penny Stocks are mainly risky because they’re highly speculative in nature. But even so, Penny Stocks still attracts a lot of traders. And if you’re trading on the Nasdaq, a stock being listed on the Nasdaq usually mitigates most of the risk that is mentioned above.

If the currency you’re trading moves in the opposite direction of your prediction, your leverage adds to your losses, which can wipe out your brand new account in a matter of days.

Investing in Penny Stocks

The Top Reasons Why Investing in Penny Stocks is Better for New Traders. Although also risky, Penny Stocks are almost always the better choice for new traders because: 

1.

Manageable Risk with High Reward Potential

It is possible to mitigate the risks associated with Penny Stocks and make immensely good profits. Selecting the right stock is key. When you select the right stock, there is potential for high rewards. Most people tend to lose money while trading Penny Stocks because they don’t know how to read a chart properly, and they don’t understand the psychology that comes with trading and what instances lead stocks to all pretty much maneuver in similar directions. At the end of the day, only 6% of day traders will be profitable for this exact reason!

Penny Stock investors who are successful and have had some experience know that it’s important to select the right stocks (as well as knowing how to do it). This is why I always stress the importance of working with a mentor. A mentor who has had enough experience trading Penny Stocks (and found success in it) is able to steer you in the right direction. They will guide you on how to go about learning patterns and strategies, which will help you choose which stocks to get in and out on, the “right” way, instead of second-guessing yourself and falling into the common traps that day traders face.  

2.

Good Fit for Investors with Limited Capital

Most new traders enter the market with limited capital. Penny Stock Trading allows you to find success even with limited funds. You just need to be aware that this field is speculative, has risks associated to it, and you must manage it by learning about advanced strategies that you just can’t find online. With research, knowledge building, and a focused strategy, Penny Stocks can yield similar results to Forex, with a lot less risk associated to the trading methods. 

When I first began, I did not have all the money in the world to invest. But I did have the drive, conviction, and commitment to make things happen. Even today, that is my mantra as there are no magic formulas to success with Penny Stocks. What is required is the right attitude and guidance. This is how even during a global pandemic I have been able to make $1.15 million with a $70,000 account. No matter how small your account, you can achieve big returns with Penny Stocks and that is the beauty of it. 

3.

Great Returns with Right Guidance & Practice

Since I always recommend that beginners hire a proven mentor, it’s a good idea for them to invest in Penny Stocks (with the right guidance) as the returns can be pretty significant. Beginners should start with paper trading first and practice to figure out the risks, how to work around them, their own style and strategy and to get a feel of things. Paper trading doesn’t require any money, yet allows you access to the stock market and lets you trade for free. With paper trading, you can figure out the risks involved and reduce your chances of loss during actual trading.  

The idea is to focus on risk management, thereby making Penny Stocks a risk-averse option for you to make profits. With proper risk management, the appropriate strategies, and the right mentor, risks in Penny Stocks reduce to the extent that they present the best option for new traders.

Being a mentor for new traders is a huge endeavor for me which I take very seriously. It’s a passion of mine and I am always available for my students who are dedicated and driven.  

Penny Stocks Trading is a full-fledged career which, if you take it seriously and put in the work, can completely transform your life and help you achieve financial freedom.

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