When the time comes for you to finally pick your first stock is when most new traders make the mistake of picking penny stocks, which seem very attractive to them for some reason. Does a Tata Nano car (the cheapest car in the world) seem more attractive to you than a Ferrari? Just as cars the price of stocks are often an indicator of the quality of the stock. Basically you’ll get what you paid for. This doesn’t mean that some high priced cars or stocks are not overpriced, but you are much safer going with higher priced stocks. I am certainly not telling you to look for the most expensive stock, but what I am saying is not to buy a stock that is too cheap or too overpriced. Just like shopping for a car you want a fair price for the quality. The only difference with the stock market is that your intention is to buy a stock to re-sell it at a higher price later. So basically you have to look for a valuable stock that seems undervalued and also whose price is trending up. Penny stocks should be considered 100% gambling as very little is known about the company and it is most likely driven by rumors. Penny stocks have very low activity (sometimes only 2-3 trades in a day) and therefore are extremely volatile. Penny stocks can be easily manipulated and you may easily fall victim to unknown forum users who are either making promises that the stock is about to “rocket to the moon” or about to “fall from the sky”. Keep in mind that these types of posts can be found in every stock forum no matter what the price of the stock or the size of the company. The problem with penny stocks is that the moment you get in it’s hard to get out with a profit. A penny stock who’s last price was $0.50 can easily have an ask price of $0.65 and a bid of $0.35 if you don’t pay close attention. What this means is that if you place a market order to buy the stock you will be paying $0.65 per share while only being able to sell it at $0.35. That’s a -46% loss after just entering into your position. Although this example may seem extreme this type of scenario on a slightly lower scale is not that uncommon. Most people who know very little about trading or are just starting out will tell you or believe they have more chances of hitting the jackpot with 10000 shares at $0.50 than with 10 shares at $500.00. You are closer to going bankrupt with a $0.50 stock than with a $500.00 stock. By investing in 10000 shares at $0.50 or 10 shares at $500.00, you are just simply cutting one pie into different pieces. But 1 share at $500 is worth more than 1 share at $0.50. In the end whatever gains you make percentage wise is based on the amount you invest; which in this case is the same amount. However a higher price indicates better quality because it’s less accessible to the average Joe and will keep speculators away and provide more stability and as a result less volatility on a higher priced stock. E.g. you have 2 pair of shoes: one for $20 a pair and another for $200 a pair. More people may own or could afford the $20 pair but it is obviously of cheaper quality than the $200 pair that less people may hold. Typical beginners’ mistakes are to assume that they have the potential to make more money with 10000 shares than 10 shares. Let’s set the record straight:
“The amount of shares you have mean nothing, only the value of the shares matter.”
When buying a pair of shoes I’d rather invest $200 in a good pair of shoes than $200 in 10 pair of shoes that will quickly wear off. However the question now is that is the $200 pair worth 10 pair of shoes of $20; or is the pair of $200 overpriced or perhaps underpriced. How long will this $200 pair of shoes last versus the 10 pair of shoes?
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