Is stock picking gambling or is that an antonym? Interestingly the former is true. Even the most sophisticated selection technique for the stock market along with the best trade timing has of course the element of the unpredictable in it. For penny stock picking there is clearly luck involved. But how much less luck is needed for trading the honorable bigger stocks, the bellwether companies, the components of the S&P?
The answer may surprise you. The luck factor is almost the same. Clearly it is more difficult to get information about a penny stock company than for an industry titan like Microsoft. But, proving here the theorem that there is not so big a difference between a billion dollar company and a microcap stock for the trader, the chance to make money with the big company is still only fifty percent.
In fact, there is no difference trying to buy the right penny stock or a NYSE giant. Both stocks fluctuate in price and both offer a chance of 50:50 for gain and loss. The NYSE stock isn’t any better than the penny stock!
But there is of course another difference. Penny stocks have much stronger moves. When you are looking at a penny stock after, say a month, it has doubled in value or it got whacked in half. The NYSE titan has moved up 10% or lost 9%. Yes, stocks move on a logarithmic scale, because they can’t go below zero.
Here comes the surprise number two. Putting half of your capital into one stock gives an average gain of 12.5% for two trades in a row with one gain and one loss for the penny stock. For the NYSE behemoth the gain is only 0.275%.
Here is the math for the penny stock:
( 0.5 * 2.0 + 0.5 ) * ( 0.5 * 0.5 + 0.5 ) = 1.125
and here for the NYSE stock:
( 0.5 * 1.1 + 0.5 ) * ( 0.5 * 0.91 + 0.5 ) = 1.125 = 1.00275
The penny stock trader comes out ahead! Given that even the best and most well known stocks can’t guarantee trading signals that come true for sure, and worse, both types of stocks offer the same rate of failure, namely fifty percent, it seems better to choose the greater volatility and that comes with the pennies.
How to do a wise selection in the penny stock markets? You need information above anything else. A penny stock newsletter or better a service for penny stock picks is needed. Don’t be afraid of admitting that others might be better informed than you, or that others are the better trading timers. What counts is the outcome! And remember, it is not necessary that the stock picker is an augur, because that’s impossible anyway. What counts is his honesty and your right money management.