As a beginner in the stock market, you will tends to hit every area to try your luck in making profit.
For examples, most beginner will buy super penny stocks that are price below 0.10 cents, hoping to get huge profit by just 1 tick ( 1 tick means 0.005 cents for 0.995 cents stocks and below.). By having the thinking of buy 0.09 cents stocks and if the price goes up by 1 tick to 0.095, you will make 55.56%!
Sounds great isn't it? In reality is not that simple. Here's why :
1. You just can't get out at a profit, even you do, is because you are lucky.
2. The losses is huge, exposing too much risk in these kind of stocks.
Look at the order queue in the image below,
Hundred thousands of order are place in front of you. It is very difficult for such stocks to move a tick. Even if you place the order there for years, it might not able to sell.
Secondly, the price movement. Look at the chart below :
The price movement is always constantly fluctuating between 2 to 3 ticks, daily. You have to wait ages to wait for the price to reach 1 tick up AND clear off the hundred thousands order infront of you. Not to forget, to make 55.56% if the price move up, what if it goes down 1 tick? You are basically gambling, hoping a 50:50 chances, infact is not even 50:50 chance.
You might think you can buy at the bottom, but do you know where is the bottom? You might say the price is lower than intrinsic value and it might not go down further. Well, stock price can change, so to the intrinsic value, if there are changes in the financial statement. Secondly, there are so many stocks that are below intrinsic value but not moving for years too. Always remember, in order for a stocks price to move, there must be a demand in it, this is what you need to follow.
Not Liquid Stocks
2nd mistake that most of the beginner do in the stock market, entering into stocks that can easily fly few cents up, but also can plunge a few cents down in days or minutes. This is not because that particular stocks is very active, is purely because is not liquid. Such as the image below :
This kind of stocks, the price can just fly up 4 ticks the next day. Many beginner will think if I buy today and tomorrow the price fly up 4 ticks and immediately sell you will gained profit! In fact, is not again. Look at the image below for the buy sell queue order. See whether you can sell at your desire price or not.
You might want to sell at 0.720 to gained 0.155 cents of profit. But their isn't any buyer in the market want to buy your shares in 0.720! Why this kind of stocks is not liquid with not many shares available for buy and sell, partly because majority of the shares are holding by the shareholders and no one have intention to push the price up, therefore price is not active and if you want to sell at a certain price you will not get it, because no buyer.
You might think this stock is good since the shareholder are holding it means they have confident in this stocks! No,no,no, sometimes is just because they want to retain the majority shareholding in that particular stocks but don't want competitors to take over in the market. Shareholder holding majority of the stocks is not healthy for the investors or traders if they have no intention to push the price up, in fact they can't push the price, because if the fund management wants to acquire some shares, they just can't get anything from these kind of stocks, because the shareholders just don't want to sell. Which means, no demand will be created and also means that the price will not move up because there isn't a demand!
A summary to all beginner, don't dream of making big from super penny stocks, you are just gambling not trading or investing your money wise. 2nd thing to take note, never just look at the potential profit you can make, you have to look into liquidity and whether is possible to realised profit even you are in paper profit. No point of having a paper profit, most important thing is you can take the profit into your pocket.
Final words for all beginner, never let your greed take control, control your emotion and react to the market.
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This blog is for educational purpose only. It is not and advice or recommendation to buy or sell financial instrument. Viewers and readers are responsible on your own trading decision. The author of this blog are not liable for any losses incur by any investment or trading.