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| Penny Stock Basics |
| Strategy |
| Hedging with Penny Stocks |
| Screening and Research |
| Using penny stocks to hedge your portfolio may be a more viable option than you think. Traditional hedging typically involves using complicated options or derivative securities, and doing it yourself may require opening margin, options, futures, commodities and foreign exchange accounts. All hedging practices consist of one simple theory, however, and that involves the concept of insurance. Hedging your bets is a way to help insure that you will be covered if things do not go as planned. Using Penny Stocks, one can often hedge a much larger portfolio while risking only a tiny percentage on low priced shares, and be able to do it with ease, right from an online brokerage account. Exchange traded funds, or ETF’s have emerged as a way for the average investor with a stock trading account to buy baskets of securities in different economic sectors or on different exchanges. This can be a way to hedge your investments without opening up any new accounts; unfortunately several problems with this practice exist. Let’s say you’re heavily invested in bank stocks, and you want to ensure that rising interest rates do not destroy your portfolio. You believe that bond funds will do well in this scenario, and you decide to sell half of your bank stocks and buy a treasury bond ETF. If you are right, you will ensure that no matter what happens to interest rates and bonds, your account value will likely stay right where it is. If you are wrong, however, you may be worse off then when you started. By using penny stocks, you can still make out if your major investments continue to perform, and if they falter, you may still make out. In the above example, let’s say you believe that if rates go up, then repossession specialists may do well. You find a tiny public company that specializes in asset recovery for banks and financial institutions trading for just pennies a share. You sell just 10% of your bank stocks and buy shares in the Micro Cap Company to hedge your portfolio. If you are right, and your bank stocks fall by 20% on rising rates, your penny stock could easily double or triple on accelerated revenues more than making up for your loss. If rates stay low, and your bank stocks rise another 20%, your original 10% invested in the high risk penny stock is all that has been risked. If you are completely wrong, you have at least kept the risk down, and have not accelerated any losses in your portfolio. |
| You don’t have to be a major player in the world’s financial markets or be millionaire to enjoy the benefits of hedging. Take a look at your own job and your plans for retirement. Maybe you are heavily invested in your own company’s stock options, or maybe your job and salary hinge on the profits of your business. You may work for a company that buys coffee beans, and then roasts and sells them. You know that your livelihood may hinge on the fluctuations in commodity prices, specifically the price of coffee beans, and you are aware of some threats that could send prices higher. By selling a small percentage of your stock options or even by allocating a few paychecks you could buy shares of several different penny stocks poised to move in your favor in the event of these known threats. These may include tiny companies selling pesticides to harvesters in the event of an epidemic, a company that delivers water in case there is a drought or other natural disaster, or just a company that sells unroasted beans who will experience better margins in the event of sustained higher prices. Any one of these stocks could skyrocket during tuff times taking a lot of the pressure off. If business remains good, you have not risked more than the small percentage of your assets used to buy the penny stocks, and chances are they won’t be completely worthless. The concept of using Stocks under a dollar to hedge is not limited to just insuring investments. You can bet against rising gasoline prices, heating oil and propane or natural gas prices, electricity bills, food and even real estate prices to name a few. Let’s say you have a long commute to work, and you understand that a one dollar increase in a gallon of gas will translate into a thousand dollars extra spent per year in transportation costs. By putting a few hundred dollars into the stock of a tiny gasoline refinery company trading on the OTC Bulletin Board, you can hedge your commute so to speak. Timing is everything, but finding a stock with just the right capital structure could yield triple or even quadruple digit profits in the event of a one dollar spike in the price of gas. If gas stays the same or goes down, you have only risked a few hundred dollars, of which is made up by the lower transportation costs. The main thing to remember when hedging is that if the event or catalyst that you need to insure has already occurred, then it is too late. You must place the most emphasis on hedging your portfolio specifically during periods of affluence and prosperity. |
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