One big issue for all beginner traders is that they don’t usually have large amounts of money to trade with, thereby triggering losses at the very start. Signs of strain emerge when they realize that their account balance doesn’t meet the requirements to begin trading on traditional exchanges – hence missing out on an opportunity to purchase best performing stocks in the industry. Because of this, many traders tend to find what stocks to buy on the cheap and where to trade them. As you might have guessed, all this searching eventually lead into penny stocks as the only investment that doesn’t cost much and promises incredible returns with little money required. But when it comes options, only a handful of traders can see the differences and similarities between the two securities. In this article, we are going to break them down for you to find out which one is better to trade.
When comparing penny stocks and options, first we need to point at their main difference rather than similarity. Options are derivatives that give the right, but not the obligation, to the buyer to either buy (call option) or sell (put options) the underlying asset (aka security) at a certain price and on an agreed date. That certain price is called a strike price and this is actually static value that never moves along with the stock price. Further to this – options have their own prices/values that chase the price of a share.Other than that, the rest is similar given these are securities which trade on OTC. If you jump into a bear market – the price will drop, while in a bull market it will go up. Both have BID-ASK spread which makes a bit expensive in terms of daily commissions. In other words, if you decide what security is cheaper to trade, all the fees are almost the identical – therefore cost of trading is not critical here.
Penny stocks are known as highly volatile securities where someof them can make 40-50% runs in just a few days – thus making huge gains for the holders even after a series of short downfalls.Penny stock market not as stable as Big Boards given they have tight regulations while microcap company’s silly announcements may lead to a price drop – hence wiping off all the open positions. However, when it comes to liquidity, options may have far better standing due to chasing ETFs and big board stocks, which are consistent, and trade high volumes on a daily basis. That gives you an opportunity to close out your position in-the-market and pull some profits off the market.
As spoken earlier, both penny stocks and options are relatively cheap to begin your trading journey. While traditional exchange have higher barriers to entry, in these cases $1,000 – $1,500 would be enough for a comfortable start. Don’t forget to paper trade before risking real money – practice selling and buying either penny stocks or options using simulations and/or trading plans.