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Penny stocks and options are high volatility investments that attract both the trader and also the long-term investor due to the bit of capital required in order to make substantial gains in comparison with less volatile higher priced stocks. The long-term investor buys a stock believing that the company's value will increase as time passes and also the stock price together with it. When he buys an option It‘s usually to scale back the risk in owning the underlying stock. The short term trader looks at things just a little differently. Typically a trader looks for large percentage price movement over a brief time period. Large percentage, short term price movements could be found both in options and certain penny stocks.
Penny Stocks tend to be defined as stocks priced below $5. It‘s often implied, although not necessarily the case, that penny stocks will also be micro caps with capitalizations of lower than about $250 million. Penny stocks could be found over the full choice of capitalizations from micro caps to large cap stocks. For instance, Sun Microsystems (NASDAQ : SUNW ) met the definition of the penny stock for much of 2004, trading between $4 and $5. In late 2004, trading between $5 and $6 per share, its capitalization was over $18 billion. The value of a giant cap $18 billion stock would rarely be expected to maneuver by a big amount over a brief time period. The biggest percentage daily price gainers, of say 50% or even more are typically stocks that started from $5 or less. But you are typically micro caps.
As a gaggle, micro cap penny stocks are avoided by large funds because prices are too easily affected by sizeable buy and sell orders and capitalizations are too small to affect a big fund's main point. Buying greater than 10% of the publicly held company carries by it certain insider responsibilities. Large funds must wait until stock prices rise typically above about $20 before they could become seriously involved without moving the value but still have price movement impact their financial results. The small investor includes a distinct advantage over large fund managers when he takes an early position in a very good micro cap penny stock.
Short term options are best suited once the underlying stock has a better price, say above $50. While It‘s more inclined that the micro cap penny stock will gain 50% inside a single day than It‘s for a better priced stock, the typical 5 or 10 to at least one leverage that options provide causes it to be only necessary for a better priced stock to maneuver 5% to discover a 50% gain inside the corresponding option price. There are many additional considerations associated with choosing an option. Not the smallest amount of those is that the market environment. When chosen properly, choices for higher priced stocks provide a similar large daily price movements of penny stocks. Lower priced stocks got to move by a bigger percentage in an effort to see an identical percentage move inside the corresponding option. They‘re only likely to do this when they are micro cap penny stocks.
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