Practice trading is important in any market, but it can be especially important with penny stocks. Too many people want to jump into this market because of the possibility for high returns, but they underestimate the risk, or the other costs of trading these stocks. Practicing with paper trading may be able to save you a lot of money and heartache. You can determine whether you are ready for this market, and if so you can start refining your skills without the risk of heavy losses.
Penny Stocks Aren't Cheap
The names, penny or micro stocks, can be deceptive. Some people think this is a cheaper or easier way to get into the stock trading game because the price per share is low. Many also think this implies less risk. Unfortunately this isn't the case though. While the price per share is much lower in this market, these stocks are bought and sold in high volume.
The other thing that can make them costly is the quick and frequent change in price; of course this is also what makes them appealing to some. It isn't unheard of for these stocks to gain or lose 50 percent of their value in a day. When this happens you either double your investment or lose half of it. Sure, doubling your investment sounds great, but can you stand to lose half of the value of your investment? When penny stocks drop they can also be more difficult to get rid of, so you may be stuck with them as they are falling in price. In this scenario you may lose well over half of your investment.
How Practice Trading Can Help
Almost no one is good at something when they first do it. The same goes for trading stocks, only if you're not good at this you can lose a lot of money. If you practice paper trading you can refine your strategy and work the kinks out before you start trading with real money. You may also decide this isn't for you and move onto something else. It's a lot better to decide this after practicing instead of after you have lost a bundle.
Keep in mind practice trading will only help if you take it seriously. If you cheat or if you don't record everything while practicing, you may not get the same results when you start making real trades.
Practicing will help you get a feel for this market and help you refine your skills so you can have greater success with your real trades. It can also help you look at all of the details, costs and fees involved in this market. It's better to know ahead of time than to find out later.
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