Spread Trading Solutions

You must have an efficient penny stock trading system in place before you begin trading this kind of stock. Why? Because there have come to be more and more dangers and risks, and falling victim to just one can severely dent the profits made on the previous few trades.

We generally only hear the good news - how profitable trading penny stocks can be. These stocks can suddenly increase in price and shoot up by sometimes 100 per cent or more in a matter of days. Increases of 500 per cent in a couple of weeks have been known. That's why they're so popular.

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But, as you might expect, this comes at a price. Volatility like this can work both ways, and many traders have been caught out by a sudden unexpected fall in the share price. Even when the price has gone up an investor can find it very difficult to sell the shares, owing to the lack of liquidity, most penny share companies being small with few shareholders.

When penny stocks are first issued they won't have been approved (or disapproved) by the appropriate regulatory authority (in the United States the SEC - Securities and Exchange Commission, and in the United Kingdom the FSA - Financial Services Authority). Information about the issue and the company can be hard to get hold of and may be unreliable, and the share price is therefore very difficult to put a value on. The share issue is normally not very large, it is usually thinly traded and is therefore easily manipulated.

Then there is the "pump and dump" scam, where the price of a penny stock is talked up through the spreading of false information, usually involving a fantastic story of an imminent discovery or technological breakthrough of some kind. If you're offered shares that have recently increased in value, through a not-very-well-known broker against such a background then be on guard. Does your penny stock trading system protect you from this?

Very often brokers dealing in penny shares don't charge commissions in the normal way , but operate a spread instead. The difference between the selling price and the buying price can often be 25 to 33 per cent, and sometimes up to over 100 per cent. And there are two sets of bid and ask prices - the inside and the outside.

Add to this the fact that brokers often mark the prices up on top of that. They do this because they often risk losing money by holding penny stock ready to sell - stock that can and often does suddenly fall in price. And they want compensation for that risk.

And you have a situation just made for exploitation of the unwary by the unscrupulous. In any event this helps explain why penny shares are usually over-priced, and the windfall profits sought after by traders are so elusive, no matter how good their trading system is.

Every reason you can think of, really, not to get involved in penny stocks, unless you have a reliable penny stock trading system and stock trading tools.

Whatever else it has, this system should check on the liquidity of each target company, how long it has been trading, and the history of the share price. All fluctuations in the latter should be explainable. It should ensure you only deal with a reputable broker, who won't try and offload overpriced shares onto you, and who charges no more than a fair commission or alternatively has only a reasonable spread.

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