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Trading Penny Stocks in the UK

If you are reading this, chances are that you have recently been thinking about investing in the stock market.

Now either you are wary of investing a large amount into something as unpredictable as a stock exchange market or you simply don’t have the means to. Either way you are left with an option of trading penny stocks. If done properly, trading penny stocks can be equally beneficial with an added advantage of minimised risk, which makes it essentially a win-win situation.

Penny Stocks

Penny Stocks are generally described as the company shares that are valued at less than $5. Timothy Sykes is a popular name in penny stock trading. He turned his investment of nearly $12,000 into a whopping $4 million holding. In his own words, he was able to achieve such a fascinating growth by understanding the dynamics of penny stock trading market. As simple as that sounds, the process require keen observational skills, a not so ‘risk-averse’ attitude and lots of patience.

Previously trading of stocks required agents and only those who were able to afford the hefty trading fees of those agents were able to trade. But with the introduction of the financial platform such as Admiral Markets anyone with the understanding of financial markets can trade the stocks online.

Accessing the US penny stock market from the UK

One of the biggest concerns for people in UK, who are interested in trading penny stocks, is to gain access to the market through a reliable source. Penny stock market is volatile as it is, therefore it is imperative that the broker you choose keeps a transparent flow of information. This is where we come in. At Option.Finance we aim to provide you with all the available opportunities to give you a reliable access into the stock market in United States, whether it’s NASDAQ or NYSE. If you want to know more about our services, you can find it here.

One of the most important things that you should know before getting started with penny stock trading, is that most of the penny stocks are not listed on NADAQ or NYSE. Penny stocks are usually listed on OTCBB (Over-the-counter Bulletin Board) and on Pink sheets. OTCBB is a comparatively safer way to search for the penny stocks to trade in because they are registered with SEC, while pink sheets are not, which makes them highly prone to scams.

Gained access? What’s next?

So now that you have access to US stock market and have a better understanding of where to look for penny stock listings, what’s next? You need a reliable broker that is compatible with your trading requirements. Some of the prominent names, operating in the market currently, are IQ OptionAdmiral Markets and eToro, and we have partnered with them to provide our clients the best possible online stock trading experience. You can sign-up with any of our brokers here.

With the right understanding of the penny stock market and a powerful brokerage platform, anyone can turn their investments into a profitable venture. We at Option Finance make sure that we provide you access to stock markets globally and connect you with reliable brokers and get you the deals through our partnerships.

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What does leverage mean for CFDs?

The British FCA (Financial Conduct Authority) stated that many traders do not fully understand the risks of trading contracts for difference (CFDs).

This is one of the easiest ways of speculating on the stock market.

CFDs and other similar financial products allow you to speculate on the future price movement of anything from the FTSE 100 to individual shares or currencies.

Trading with leverage

Leverage means that you only have to deposit a small percentage (margin) of the total value of the investment. The remainder is provided by the broker you are trading with at a specified rate of interest. However, your profits or losses depend on changes in value of the total investment. Leverage magnifies your profit, or loss on a position.

If the total value of your initial trade position is £10,000. The leverage ratio offered by a broker is 100:1. The initial margin for the trade is at 1% of £10,000, therefore you would only need to deposit £100. A market movement of 0.5% against your position, with original value of £10,000, will lead to a 50% (£50) loss against your deposited margin.

Margin close outs

There’s a high chance for your trades being closed at a loss, due to ordinary intra-day market volatility. This is because of high levels of leverage and brokers’ use of automatic margin close out. Trading positions are closed if your available margin falls below a certain level.

Gambling-style promotions

Brokers inform you of bonuses and other freebies. This is too similar to gambling-style promotions. Opportunities to win bonuses through trading or the offer of account opening bonuses or gifts. These promotions can become a distraction for traders. You have to properly assess the level of risk associated with the investment product and trade accordingly.

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What’s the difference between Options and CFDs?

Options and CFDs  have a number of similarities, but there are also a number of differences.

Both financial derivatives suit their own particular purposes. You don’t own the asset but just have a position open based on the asset price. However, there are several notable differences about the way the two products are leveraged.

It’s the actual pricing of the instruments that distances any similarities. While at first look, the two instruments might seem similar.

Factors for comparison.

While contracts for difference are agreements to close out a contract for the profit or loss in the difference between the opening price and closing price of an instrument. Options are simply rights to later purchase shares or commodities at a set price. Options are bought at a fraction of the underlying asset price, and give the trader the right to later acquire the asset if he so chooses. Most often when it’s profitable. The profit portion for the trader comes in later exercising his options when the market for the asset concerned increases. Profit = Selling Price – (Buying Price + Option Price).

Practical differences

The transparency of instrument pricing differs greatly between CFDs and options. CFDs are more accurate tracker of underlying markets than options for many reasons. Options suffer, in the same way as futures. From a decline in their price point as their expiry looms, and indeed it is only logical that this would be the case. The value of the right to buy the shares is, after all, less valuable with less time to exercise that right in your favour before it becomes void. It is often harder to get a feeling if an option represents true value and a fair reflection of the underlying asset market.

CFDs track the underlying market virtually pip for pip. Brokers are required to match corresponding CFD positions with positions of the underlying asset market. As a hedge against risk and a value-added service for traders. This can make it far easier to follow how the pricing is laid out. The exception of certain ‘market makers’, who as brokers have responsibility to set their own spreads and price points, this presents a much more transparent and clear representation of price.

CFDs options

Another advantage of contracts for difference is that they are available to trade in many ways compared to options. This includes indices, exchange rates, bonds, etc. You can trade options on the basis that there is an underlying asset. While you can’t trade options in conjunction with any index or rate. Depending on which bases you are looking to trade this may or may not pose a problem. However, for new traders looking for as much flexibility as possible, contracts for difference provide wide possibilities.

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Why did the pound “flash crash”?

Several theories have emerged about why the British pound tumbled from about $1.26 against the US dollar to about $1.18 in just two minutes on Friday morning.

We may never know the precise reason despite the Bank of England looking into the cause. Foreign exchange markets are complex. There are many trading systems operating in the market across time zones and there’s no single collector or provider information.

Forex in Asia

The crash happened just after midnight London time, when liquidity in forex markets is typically low. Forex trading in Asia is spread across many key centres like Tokyo, Hong Kong, Singapore and Sydney. But low liquidity itself isn’t a cause for a so-called “flash crash”.

Fat Finger

It could be down to a so-called “fat-finger” trade where a person types in a wrong number in an order. In a market increasingly dominated by algorithmic trading done by computers it could also have been caused by a glitch in a programme (‘algo’ for short). These sorts of glitches have happened before, notably in 2010 in the US stock market. If it was a fat finger by a person at a bank, we should have found out fairly quickly. Counter-parties acknowledge the error and wipe the trades out. If it’s an algo glitch, then we may never find out.

Other Explanations

There are other possible explanations that are often trotted out when market moves can’t be explained. Including a build up of stop loss orders at a certain point and when those are triggered there’s a large subsequent move.

Solutions

There’s not a lot traders can do about flash crashes. They can’t be predicted, and thankfully they’re rare. But sterling markets have been highly volatile ever since the UK voted to exit the EU. Traders need to consider mechanisms like guaranteed stops. It also pays to use common sense – the pound is now highly susceptible to the kind of surprise headlines (‘tape bombs’ to use the lingo) that can cause rapid movements in prices. As well as using guaranteed stops, it makes sense from both a financial and a psychological approach, to use smaller position sizes. FX markets are volatile at the best of times, but now news flow is combining with low liquidity (compared to previous years) to make this asset an even more volatile place.

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