Comments on: If You're Going to Trade Stocks, Read This First

By: Lee Distad

Lee Distad — Wed, 30 Sep 2009 13:26:30 +0000

Ha, there is always that! It doesn't even have to be as dramatic as going to zero, just going in the wrong direction and staying there indefinetely, which is why market timing is not a good strategy.

Thanks for your comments!

By: Brad Castro

Brad Castro — Tue, 29 Sep 2009 20:58:14 +0000

Sure – I understand where you're coming from, but I think the implied advantages from the increased volatility of penny stocks is mitigated to a large extent by another implied possibility – that the company might trade down to zero.

Of course, when I speculate, I'm just trying to pick up another couple hundred shares of MCD or SBUX at a discount.

Looking forward to reading more . . .

By: Lee Distad

Lee Distad — Tue, 29 Sep 2009 20:32:07 +0000

Hi Brad,

Thanks for the kind words. While it's true that a 10% gain in share price will be the same gross number if a $10K position is composed of $100, $10, $1, or even $0.10 shares, the reason why block volume matters is that it requires less dramatic price movements to realize a gain. Remember, we're not buying and holding, we're speculating on the short term volatility of a share price.

Let's assume we're really aiming low as traders here:

If you have 100,000 $0.10 shares, a one cent gain is $1000
If you have 10,000 $1 shares, a one cent gain is $100
If you have 1000 $10 shares, a one cent gain is $10
If you have 100 $100 shares, a one cent gain is $1

Net of your brokerage fee, only one of these outcomes is worth trading on.

Let me reiterate that I think short term trading is no way to make a living, but does that example clear up my perspective on book size?

By: Brad Castro

Brad Castro — Tue, 29 Sep 2009 15:25:04 +0000

I'm glad to have come across this blog . . .

I can relate to your investing and trading philosophy. I'm also a long term buy and hold investor. But I also employ certain conservative option trading strategies to perpetually lower the cost basis on my holdings (which I've termed, "Leveraged Investing").

Actual Investing is the easiest (and most likely) way to grow wealth, but the option trading helps stack the deck as well as satisfying what you referenced as the "entertaining" aspect of trading.

The only point where I would disagree is the need to trade low priced securities so that you can trade thousands of shares at a time. If you have $10K to trade in a position, what difference does the share price make? Whether it's $10/share (i.e. 1000 shares) or $100/share (i.e. 100 shares), you're still working with the same amount of capital.