Share Trading

As we flounder around in the present financial meltdown, I've been seeing some articles promoting 'penny dreadful' stocks on the basis that you stand a greater chance of doubling your money than if you bought a blue chip stock like BHP, when the market eventually rises.

Whilst these small cap stocks may appeal because they don't cost much & therefore may seem affordable, the blurb doesn't take into account a number of other factors, like the cost of brokerage, which can be proportionately higher on small packages; what level of debt the company has (often high);  what its cash flow from operations is (often very little, the stock being promoted on the  'potential' of its mining tenaments/likely sales of software to customers & the like); whether the company is paying dividends (not likely at its present stage of growth, as any surplus funds in responsible companies are ploughed back into growing the business); inability to trade in options & other derivatives like CFDs in this class of share; finally & perhaps most importantly, the liquidity of the company, ie will you be able to dispose of the shares when you want to in the future?

I read recently that only about 3% of the 10c Australian shares listed in 2004 are worth more than $1 now, so you would have to ask yourself if your cash wouldn't have been better invested elsewhere.  On the other hand, there has been the occasional success story, if your gamble had paid off!  These are what lure people into this sector of the market.

Personally, I have come to the conclusion that trading in shares is more risky than trading in commodities and foreign exchange, for a variety of reasons such as quality of management & government intervention.