Penny Stock Hedging Strategies

Penny stock hedging involves playing two or more sides of a trade, in order to reduce overall risk.

For example, you own US dollars as an investment. You could then buy gold penny stock companies, as gold prices generally rise when the dollar falls, and falls when the dollar rises.

This is a hedge, which helps limit the potential loss you might take when an investment drops. It also usually limits the upside you would enjoy if the original investment (the US dollar in this example) had performed very well.

Let’s say you have holdings in a transportation penny stock, who see their profit margins disappear when fuel prices rise. You may then want to buy shares in an oil production company, because they benefit from higher fuel prices.

The two will act in opposite directions to a certain extent. If the price of oil rises, hurting your transport penny stock, you will at least have gains in your oil stock. When oil prices fall, hurting the oil company, you’ll see the transport company benefit. Transportation and oil production companies make an excellent Hedge complement.

We encourage hedging for traders with larger portfolios (for example, ,000 or more) when it makes sense to the individual, although it is by no means necessary. Hedging enables penny stock traders to reduce risk while diversifying their exposure.

Hedging is a simple concept, but it can be as complicated as you want to make it. Some Hedging strategies get so involved that you could wind up with a chain of six different investments, just to protect every aspect of your approach.

In fact, hedging can take so many different forms and be used for so many different purposes that it could be a 500 page book in itself.

I don’t suggest that anyone get into highly complicated hedging strategies, but I do believe that simpler, less involved approaches can be very beneficial for people who invest in penny stock.

Sometimes it even makes sense to buy shares in competing penny stocks. If two or more organizations are going head to head for market share, buying both (or all) of them protects you if one goes out of business. You would lose your investment in the defunct penny stock, but then their competitor would enjoy a boost, due to the sudden drop-off in competition (and potential increase in customers).

Of course, while such an approach leaves you hedged against company-specific risk, it also doubles your investment dollars in the particular sector, thus driving up your overall market-specific risk.

The best hedging strategies for penny stock will be the ones that are fairly straight forward. The more complicated, generally the less likely they will be to demonstrate any significant level of benefit. In fact, highly involved approaches could leave less experienced investors at risk to confusing themselves to their potential detriment.

The key is to look for investment vehicles that act opposite to one another. If one type of penny stock sector or industry goes up in value, what companies generally then go down as a result?

Tags: Strategies, Hedging, Penny, stock

Tagged with: Hedging • Penny • stock • Strategies

Filed under: Stock Software General

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