I have $1,000 to invest. Where do I put it? Where can I make the most money in a short period of time?
Getting started in the business of day trading can sometimes be tough due to limited capital. However, most people can usually scrape up $1,000 to get started. The big question becomes where do I invest that $1,000 and how can I maximize my gains. You have several options. Let’s talk about where you could potentially invest your $1,000 and make it grow over a time frame of 12 to 18 months.
Consider the most common highly leveraged trading vehicles that are in the financial market place today.
Stock Options – Buying Calls
When buying Call Options, you have to do your homework and figure out what stock you want to focus on? The advantage of buying call options versus buying the stock is the ability to leverage your investment. You can gain a much larger return on your investment by controlling a larger number of shares with a purchase of call options rather than paying the full stock price.
Remember, we only have 1,000 to risk and because more option shares can be purchased than stock shares for a set amount of money a slight movement in the stock will generate greater returns on your investment. For those not too familiar with trading options, remember, options are available in specific months at specific strike prices and the contracts expire at the market close of the third Friday of each month. Call premiums are based on the potential upward or downward fluctuations in the stock price.
Now, you have to ask yourself, how far do I go out? Do I go out one, three, six, or nine months? If you have a long-term outlook on the stock, in some cases you can even consider going out as far as 3 years and buy what are referred to as Leaps.
Let’s briefly go over a couple of terms that describe the Option Strike Price in relation to the stock price. If you are going to buy Call Options it’s best to familiarize yourself with the terms: In-The-Money, At-The-Money and Out-Of-The-Money.
In-The-Money refers to an option strike price that is lower than the current stock price. At-The-Money refers to an option strike price and a stock price that are the same. And finally, Out-Of-The-Money is a call option position that is riskier than the previously mentioned, but some find them tempting because they are the lowest priced options compared to at-the-money or in-the-money call options. As tempting as At-The-Money and Out-Of-The-Money Call Options may seem, The Stock Wizards advises anyone buying Call Options to always try and buy In-The-Money Call Options. The reason for this is simple, if the stock price goes against you, as we get closer to expiration, there is a better chance of recovering at least some of the option premium. On the other hand, if the stock price moves up with speed, you will capitalize with a much greater premium and return on your money. This has to do with intrinsic value, which we will talk about shortly. In-The-Money Call Options may cost more because the premiums are bigger, but it’s worth it in the long run.
Let’s talk about the drawbacks of buying Call Options. The biggest drawback to buying a Call Option is if the trade goes against you. Example, if Google is trading at $500, and you are expecting the stock price to go to 550 in the next 30 days, and within those 30 days the stock actually drops to $450 a share. Guess what happens? You lose your entire $1,000. Why? Time decay, otherwise known as intrinsic value. Time decay is the biggest factor when trading Call Options. While the stock price is moving in an upward direction, the call option premium may also be moving in an profitable direction. However, this depends on the combination of time value. The call option is a derivative of the stock; therefore, the premium price is much smaller than the stock price. Hence, the upward movement of the option premium provides a greater percentage return than the increased profit potential of buying the stock. If the stock price does not move upward with speed within the specific contract period, you could easily lose your entire investment. There are many other options strategies available, and some as very useful tools when trading stocks, but since we have limited funds in this example, buying Call Options will give us the most leverage.
Remember, a Call Option buyer will generate profits if the stock rises in price. But, it helps to buy in the money Call Options like our example above. However, if you purchase the incorrect call option for a particular stock at an inappropriate time and the stock price falls, you can go from a significant profit to being in a losing position that may be difficult to recover from. Timing is everything and selecting the right call option at the right time is critical. There is bigger risk and reward than purchasing stocks and holding them. Again, if your stock price moves up with speed, you can make a significant profit with little capital.
You can also take your $1,000 and trade Futures Contracts. You can trade Currencies (Forex), and Equity Index Futures Contracts. The most popular Index Futures Contracts are the S&P minis. Let’s start with the S&P mini futures. With a $1000 there are some brokerage firms that will allow you to trade up to 1 contract on $300-$500 margin. If you want to hold your position (1 contract) overnight it will cost you $5,000 to hold. For a day trader that only has a $1,000 to trade with, the S&P mini may not be a good choice because you can lose that in a matter of minutes. The draw downs on a $1,000 account are basically too difficult to manage and becomes a losing proposition.
Forex Trading
Forex Trading. Very similar to the S&P minis. You’re buying contracts on Currencies. The only advantage of buying a currency contract that is a little more attractive than trading the S&P mini’s is that you don’t get penalized on your position if you hold it overnight. If you buy 1 currency contract and you put up $500 on margin, your margin requirements do not change and do not go up if you hold your position over night. Just like the S&P mini futures you can lose your entire investment in a matter of minutes. Most people that start off trading S&P Minis and Forex trading blow out their accounts pretty fast. The leverage and volatility is a killer for traders that have small accounts when they start. There’s not enough breathing room for draw downs if your trade goes against you.
Penny stocks usually trade on the OTCBB and Pink Sheet exchanges. These stocks typically trade anywhere from .0001-5.00. Just like Options and Futures, penny stocks give you powerful leverage on your money. What fascinates Traders and Investors about playing the pennies is that you can take a $1,000 investment and turn it into hundreds of thousands of dollars in a short period of time. However, it’s not uncommon for traders to own millions of shares of a penny stock company at any given time. Example, with a $1,000 dollar investment, a company with a stock price of .0001 buys you 10 million shares. That’s right, 10 million shares. Take that $1,000 and buy a stock trading at .01, and you can buy 100,000 shares. Imagine how much it would cost you to buy 100,000 shares of Google (GOOG) at its current price of 570 per share? The power of leverage in penny stocks is incredible to say the least.
TheStockWizards.net has found some recent examples of how you can leverage a small amount of cash and make a lot of money in a short period of time. All it takes is one big hit on a penny stock, and trust me, you will be hooked forever. With the right training and proper education you can become a very successful penny stock trader. Let’s take that measly $1,000 and invest in some penny stocks.
In 2009 the biotechnology sector was the hottest sector in the penny stock arena. Here are some of the hottest penny stocks that made some of the biggest returns that year.
In this first example the stock symbol BIEL was a Sub Penny Stock Trading below .003 when it made its big run.
In this second example this was another sub penny stock that started below .003 and made it all the way up to a $1.00 in a very short time.
This has to be one of the biggest moves of all time in the Penny Stock arena. This was a stock that was in bankruptcy before it made its move. At the very bottom, news came out on the company that had gotten FDA approval. On September 11th VRML announces the following: “U.S. Food and Drug Administration Clears Vermillion’s OVA1(TM) Test to Determine Likelihood of Ovarian Cancer in Women with Pelv.”
Timing
When starting off with a small amount of cash like $1,000, it is critical that you get into a stock that is at the beginning of the move, or is at least in a consolidation phase (moving sideways) before you buy. Do not chase.
In Closing
As you can see, the power of leverage in penny stocks is just incredible! Do not let anybody discourage you. Many believe that penny stocks are scams. Many criticize small cap stocks and believe you should stick with large caps like IBM and GOOG. Not always the case. Although large caps present a good long term opportunity, not everyone can afford to buy them. Big board stocks can be very expensive and are not always risk free either. Remember what happened to Enron, WorldCom, and more recently Bear Stearns? It’s true that there is risk in the stock market, and usually the more risk, the more reward, but if you do your own due diligence and apply some of the trading techniques we’ve discussed, you can become a successful penny stock trader even on a part-time basis. And lastly, you can also lose your entire investment in a penny stock if you don’t time your investment right and get out in a timely manner if something goes wrong. But the risk to reward ratio is incredible. Remember penny Stocks are trading vehicles not investment vehicles.
TheStockWizards.net has over 30 years combined experience when it comes to trading penny stocks. With the information that we provide, you too can be a successful penny stock trader.
TheStockWizards.net is not recommending any stocks mentioned in this article and advises everyone to do their own due diligence and understand the risks associated with day trading. Please be aware that you can lose your entire investment trading penny stocks, options, futures, and S&P minis.
