First published: 21 January 2022 @ 3:23 pm
Client: Shiirs
Written By: The Big Writer
Published At: Read More
Stock trading is a common investment method.
However, more people are gaining interest in penny stocks.
What exactly are penny stocks, and can you short penny stocks?
Familiarizing yourself with the terminology surrounding trading strategy and the stock market is a big endeavor.
Today we’ll dive deeper into the topic and review how to short sell penny stocks.
What are Penny Stocks?
Penny stocks are, “a common stock valued at less than one dollar, and therefore highly speculative.” Investing in stocks rely on the assumption that their value will increase in the future. When the stock is worth more in the future than when you purchase it, you earn money.
Speculative stocks do not have readily visible strength, so purchasing and trading them is particularly risky. Learning risk management, the art of assessing risk and deciding on buys and sells to reduce risk, is crucial for investing in penny stocks.
It is rare for penny stocks to return on investment, but when they do, they can result in increases in the thousands! Compared to stronger stocks, the period of time penny stocks takes to return what you’ve put in can be years. This is part of the reason more people are considering penny stock trading.
What is Shorting?
Stocks can also become trapped at a certain price called a resistance level. The resistance level is a price point the stock will not overcome due to many people selling at a certain price point. It is stronger than the force of people purchasing it and pushing up the stock price. This is utilized in short selling.
Shorting a stock involves borrowing the stock, then selling it before the stock price falls. Investors determine a short position, an expected decrease in a stock’s value, and attempt to sell their stocks to purchase them back before the price returns.
In order to have shares to borrow, you have to borrow these from brokers. You will owe money to the broker if you end up selling the stock and cannot acquire it back. A margin call is what brokers use to allow you additional money or stocks to invest; if you cannot maintain your account to their requirements, they can sell your borrowed stocks and charge you fees.
This was what many who invested in Gamestop earlier this year hoped would happen. Groups that had intentionally driven down the price of Gamestop in hopes that Gamestop would need to purchase them back at high prices due to the scarcity of them available. This method of driving down prices intentionally occurs often.
However, January 2021 yielded a surprising event where people who would otherwise not contribute to the market banded together to purchase stocks and drive the price back up. Therefore, the shorting strategy did not work. The investors who attempted to short Gamestop lost a lot of money. The scarcity of shares is given in cap stocks, which is the estimated value of stocks that must still be repaid to their brokers. Shorting involves risky short-term investment, and you need a margin account in order to participate.
Is it Legal to Short Penny Stocks?
Some sites say that shorting penny stocks is illegal; this is not the case. It is legal, but the high risk to both the buyer and brokers means that it is fairly heavily protected compared to getting into simpler trading options. Before attempting to short penny stocks, identify risks and penny stock companies.
Getting Into Shorting
As discussed above, shorting is a high-risk practice. Many people do not participate in without having an in-depth understanding of the process. This is because of the high chance they could not only lose their initial investment but owe more to the brokerage account. Many investment accounts entry-level users do not allow shorting penny stocks. Furthermore, this is why penny stock shorting should not make up too large of a portion of your investment profile.
If you feel you are ready to engage in penny stock shorting, there are many helpful tools. You’ll need to do research for brokers whose criteria you can meet. To help protect you, take greater security measures and craft a solid financial foundation to stand. This ensures you will be financially sound if you do lose investments.
Financial Help from Shiirs
Investing can be a complex, confusing space. There’s a good chance you may not have heard about penny stocks before today, and that’s okay. Whether your financial goals involve penny stocks or not, Shiirs is here to help. We provide helpful tips and tools for all key aspects of personal finance. Explore our helpful offers today and crush your money goals!
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