If you’re new to stock trading and want to learn how to pick the right stocks, it’s important to know that stocks come in many different forms. Different types of stocks come with varying privileges, levels of risk, and profit potential. If you’re able to determine which kind of stocks best suits your financial situation, skills, and goals, you can find your niche in the multi-faceted world of stock trading and focus your efforts in the right direction. Check out this comprehensive guide to gain a better understanding of the different types of stocks.

Key Takeaways:

• What Are the Different Types of Stocks?
• Common Stocks
• Preferred Stocks
• Growth Stocks
• Value Stocks
• Income Stocks
• How to Choose the Right Types of Stocks

What Are the Different Types of Stocks?

Stocks are a type of investment that allows you to own shares in certain companies. By investing in stocks, you’re actually purchasing a percentage of ownership in a company. For example, if you buy stocks from Apple, you effectively become a “co-owner” of the company. While you may not be invited to the shareholders’ meeting, you may get the right to vote on corporate issues such as the election of the board of directors or approval of takeover bids. While it involves some risk, stock trading is widely regarded as one of the best ways to generate wealth.

Knowing the different kinds of stocks is one of the first things a beginner trader should do. Each type of stock has its own pros and cons, which you need to carefully weigh in order to choose the right type to invest in. There are many different types of stocks, including the two main kinds of stocks and several other less common types. Below are five types of stocks you should know:

Common Stocks

If you’re wondering what are the two types of stocks that are most widely traded, one of them is common stocks. When people talk about stocks, they usually mean common stocks. When you purchase common stocks, you’ll get partial ownership in the company that issues the stocks. Also, you may receive dividends and voting rights.

If a company does well or the value of its assets increases, its common stocks will go up in value. However, if it performs poorly, then the value of its common stocks will decrease. Buying common stocks is a great long-term investment strategy because it allows you to share in the company’s success over time.

While they offer the highest profit potential, common stocks expose their holders to greater risk when unfortunate events happen to the issuing company. For example, if a company goes bankrupt, the common stockholders will be the last in line to redeem their shares, behind banks, bondholders, and preferred stockholders. As such, common stockholders often get nothing when companies restructure or go bankrupt.

Preferred Stocks

Preferred stocks are the other main type of stocks. Just like common stocks, they represent a share of ownership in a company. Typically, the dividends that stockholders receive from preferred stocks are greater than those that come with common stocks. Also, the dividends are fixed while payments from common stocks may vary depending on the net profit of the company. Another advantage of preferred stocks is that they allow their holders to redeem their shares before common stockholders in the event that the company gets liquidated. However, preferred stockholders don’t have voting rights.

There are two types of preferred stocks: cumulative and non-cumulative preferred stocks. In cumulative preferred stocks, dividends that aren’t distributed to the stockholders are accumulated in an account. These dividends are called “in arrears.” Before any dividends can be distributed to common stockholders, the full “in arrears” balance must be distributed to preferred stockholders first. In non-cumulative preferred stocks, stockholders don’t have the right to claim unpaid or omitted dividends even if the company generates substantial profits the following year.

Growth Stocks

Growth stocks are shares in a company that are showing above-average earnings and growth potential that surpasses that of the overall economy. Unlike common and preferred stocks, these types of stocks don’t pay dividends since companies tend to reinvest their profits to accelerate their growth in the short term.

If you decide to invest in growth stocks, you’ll earn money through capital gains when you eventually sell your shares. Therefore, growth stocks are considered riskier compared to common and preferred stocks. You’ll be rewarded with high capital gains if the company does well, but you’ll take a loss if it performs poorly. Companies that issue growth stocks are typically from the technology and biotech sectors.

Not all growth stocks are created equal. If you’re interested in this type of stock, you need to be on the lookout for the following four characteristics:

• The company needs to have a stellar management team with a good track record for being innovative.
• The company needs to have a significant market share in a fast-growing market.
• The company needs to cater to a massive market.
• The company needs to have a strong record of revenue growth.

Value Stocks

Value stocks are stocks that trade at a lower price relative to a company’s earnings, sales, dividends, and other business fundamentals. When investing in value stocks, investors try to capitalize on inefficiencies in the market since the prices of value stocks aren’t necessarily indicative of the issuing company’s performance.

Value stocks typically come from mature companies that are consistently paying dividends but have a negative reputation or image because of certain events, such as product recall, legal problems, or unsatisfactory revenue reports. As such, value stocks are regarded as riskier than growth stocks. For value stocks to become profitable, the market must change its perception of the company.

One of the advantages of value stocks over other types of stocks is that they offer excellent profit potential. However, it can be extremely challenging to identify these stocks. You can analyze companies comprehensively and still arrive at a wrong conclusion. Also, value investing requires a lot of patience. It can take years before value stocks become profitable. There’s also the possibility that the market will never change its perception toward the company.

Income Stocks

Simply put, income stocks are stocks that pay consistent and steadily-increasing dividends. These stocks are less risky than the other types of stocks and pay higher-than-market dividends. Many investors classify income stocks as defensive stocks, which are shares from companies that provide services and goods that are generally needed regardless of the shape of the economy. Keep in mind that defensive stocks are different from defense stocks, which are shares of companies involved in the production or sale of military equipment and goods.

A perfect example of income stocks is those of retail giant Walmart. Over the last 30 years, Walmart’s stock price has risen consistently. This enabled the company to pay rising dividend yields to its stockholders. In 2015, Walmart’s dividend yields peaked at 3.32% despite facing a threat from e-commerce stores such as Amazon.

Income stocks suit conservative investors who want some exposure to corporate growth profit but prefer a low-risk, consistent source of income. You can find income stocks in almost any industry, but they’re most common in the real estate, natural resources, utilities, and financial sectors.

How to Choose the Right Types of Stocks

Now that you know the most common types of stocks, you can start learning how to choose the right kinds of stocks to purchase. This can be daunting, but you can simplify the process by implementing the following trading tips:

• Consider the level of risk you’re willing to take.
• Choose a company with long-term growth potential.
• Buy stocks that complement your other investments.
• Start by buying one stock and then analyze the results.
• Learn how to use trading charts as they can help you understand stock movements.
• Be patient and disciplined because results don’t happen overnight.

With thousands of stocks in the stock market, it can be difficult for a new trader to know which ones to choose. Knowing the different types of stocks enable you to narrow down your options and make better-informed decisions. You can further narrow your options by classifying stocks according to size and sector. If you think of stocks this way, it’s easier to diversify your investments and lower your risk.

Investors are always on the lookout for reliable stock tips that help them choose companies that beat the stock market while delivering tried-and-true strategies and rules for investing in them. Here are ten stock tips from investing experts from which all individuals looking to be successful in the stock market can benefit.

Latest Stock Tips and Market Tricks:

1. Do Not Invest Money You Need
2. Remember That Buying Stock Is Easier Than You Think
3. Use Limit Orders to Buy and Sell Stock
4. Avoid Mutual Funds and Indexes
5. Invest in the Individual Stocks of Great Companies
6. Plan for the Long Haul
7. Try to Ignore the News
8. Don’t Purchase Stock All at Once
9. Enroll in Dividend Reinvestment Programs (DRIPs)
10. Add to Positions Over Time

1. Do Not Invest Money You Need

The first and probably most important tip a new investor can receive is the reminder that there is no guarantee in the stock market. An investment looking good on paper doesn’t always go as planned in real life. Before investing any money into the stock marketing, investors need to realize that losing all of their money is a real, albeit unlikely scenario.

Investors can minimize the risk of significant losses by ensuring they won’t need to withdraw invested money in the immediate future. For example, at one time Chipotle (CMG) was selling around $400 a share before being attacked by short sellers, which crashed it to as low as $250 a share. Jump ahead a few years, and it was once again selling at $500 a share. The company itself didn’t change at all during this time. It just continued growing steadily as it had done for years. Investors who were able to weather the storm are now ahead, while those who needed to withdraw their money during the decline suffered a significant loss.

2. Remember That Buying Stock Is Easier Than You Think

The ease of getting started with buying and selling stocks often surprises new investors. By simply signing up for a brokerage account, potential investors can sync investing accounts with their bank accounts, allowing them to transfer money at no cost.

However, selling and buying stocks isn’t free as brokerage firms don’t buy and sell stocks for investors out of the kindness of their hearts. While not free, it’s not overly expensive either for investors using a discount brokerage whose typical fees for buying and selling range from $8 to $10.

Once investors have money available in their account, they can push the “buy stock” button to search for a company that interests them and then put in their order.

3. Use Limit Orders to Buy and Sell Stock

When buying stocks, investors have the option of purchasing via a limit order or a market order. A limit order allows investors to establish the highest price they’re willing to pay for a stock or the lowest price at which they’re willing to sell a stock. A market order means that an investor will pay whatever the current price is for the stock.

Buying or selling via a market order leaves an investor open to market whims. Stocks typically move up or down a few percentage points each day. If an investor puts in a market order, they may get caught on the high end of a stock’s average value. If they sell via a market order, they may end up on the low end of a day’s variance.

Using a limit order protects investors from these fluctuations by allowing them to set the max price they are willing to pay for a stock when executed as a buy and the lowest price they are willing to sell a stock at when executed as a sell.

By establishing a limit order for a buy at 0.5%-1.0% below the current price and as a sell at 0.5%-1.0% over the current market price, investors can seek out additional profits.

4. Avoid Mutual Funds and Indexes

One of the most common mistakes new investors make is investing in a stock market by buying into an index fund or a mutual fund. Despite mutual funds routinely delivering inferior returns, many investors place their entire stock holdings into them. Mutual funds experience two problems: rules and fees.

Understanding the fee portion is easy: there are management fees associated with mutual funds that affect total profits. A mutual fund needs to greatly outperform the overall market to pay its high management fees, something that doesn’t happen often.

In addition to fees, and even when being managed by a capable fund manager who can beat the market average, mutual funds are typically constrained by a set of governing rules the fund manager is required to follow.

Index funds also present problems for investors as they track the entire market as opposed to specific stocks. Some companies are clear losers, and investors want nothing to do with them. For example, if an index is tracking the New York Stock Exchange (NYSE) and an investor puts money into this index fund, they are purchasing a small piece of each company on that exchange, winners and losers.

5. Invest in the Individual Stocks of Great Companies

Once investors know how to buy stocks and understand that individual stocks generate better returns than funds, they need to select the stocks they want to purchase. The best option for investing in individual stocks is by investing in stocks of established companies that aren’t only likely to be around for the foreseeable future but will also continue to thrive.

6. Plan for the Long Haul

Once investors decide which companies they want to invest in and purchase shares, they should plan for the long haul. Stock prices fluctuate up and down in spurts, with even great companies losing 10%-40% of their market cap because of negative sentiments.

Successful companies are typically priced at a premium, sometimes spooking investors with the high relative cost of their stock. However, picking a great company generally means their earnings growth will eventually catch up to the share price, with the stock price following.

Just as a company can lose 10% or more of its market cap quickly, it can also gain that much in a single day. Even a company with a large market cap can be subject to jumps like this: Google (GOOG) jumped over 10% in a single day after a good quarter of its market cap increasing well over $25 billion.

7. Try to Ignore the News

Every day, news commentators attempt to spin stories about stocks, so they have things to talk about on their website or TV show. It’s best if investors can keep a safe distance from this as day to day news typically has little if any, influence on a company’s overall prospects, especially if the news is negative.

For example, when there were delays in the China Mobile and Apple deal, some commentators suggested this delay was a signal that Apple was suddenly an absolute sell. In reality, with their latest product refresh, Apple was going to be profitable with record sales even without the deal.

It’s best to ignore negative stories and instead stay focused on the long haul. Otherwise, investors may end up “panic selling” and losing a significant amount of money.

8. Don’t Purchase Stock All at Once

Another useful stock tip on how to be successful at stock trading is to split investments over multiple purchases. This protects investors from significant price drops because of a bad earnings report or other catalysts that may greatly hurt a share’s price. The best practice is splitting up an initial investment target into three equal amounts and purchasing shares 30 days apart.

9. Enroll in Dividend Reinvestment Programs (DRIPs)

A Dividend Reinvestment Program, or DRIP, automatically takes dividends issued by a company and uses them to purchase additional stock shares. When left to run over a significant period of time, a DRIP can accrue enough new shares for generated dividends to become substantial.

10. Add to Positions Over Time

Investors that want to create significant wealth via stock market trading don’t buy stock one time and then never buy again. Instead, investors continuously attempt to use their savings to purchase additional shares.

Once they get a feel for how the companies they own tend to be priced, they can begin allotting their new purchases to whatever stock has the cheapest price relative to historical values. As their experience with investing in these relatively inexpensive stocks increase, they can significantly increase their total return.

Learn more stock market tips and tricks for beginners that can lead to stock market success by downloading Jeff Bishop’s eBook “Profit Option Accelerator” and learn how you can double or triple your account balance in just one week.

What is stock buying power? Perhaps the biggest obstacle for a novice trader is understanding complex trading terms and how investing works. Anyone can understand buy low and sell high, but the smaller details behind those decisions determine the effectiveness of your strategy. If you’ve heard the term stock buying power but don’t know what it means, fret not, because it’s fairly simple to understand. What’s more, clarifying this side of things will help you understand related parts of investing, such as margin accounts.

In this article, you’ll learn that:

• Stock buying power is the total amount of money you could use to buy a stock.
• Buying power is the sum of owned cash and available funds, such as from a margin account.
• Stock buying power works differently from the buying powers of other securities.
• Stock buying power is mostly related to margin trading, which is high-risk.

What Is Stock Buying Power?

Stock buying power refers to the total funds a trader has available to invest in a stock. Buying power is the total available funds to buy securities in general. Put simply, it is the money available in the trader’s brokerage account plus any margin available for borrowing, if applicable. The amount of money you could potentially spend and borrow together on stocks or other assets is your buying power for those assets.

Buying power exists as a term in many contexts, but in trading, you can think of it as the maximum you could spend on something before hitting the red. With margin accounts, traders can borrow money from brokers to expand their buying power, basically taking out a loan.

To understand buying power better, it helps to understand margin requirements.

Margin Requirements and Stock Buying Power

In case you’re unfamiliar with margins in trading, a margin account is an account where you can borrow money from the brokerage offering the account. Such an account uses cash and any offered securities as collateral if you can’t pay up, and the brokerage makes money through charging interest.

The point of margin accounts is to increase the total amount of available money you have to buy securities by borrowing more when you need to — hence, expanding your buying power. Think of margin accounts like you would getting a loan from a bank or using a credit card. You’re being lent money to spend more than you could have otherwise. In exchange, you’re charged interest, and you’ll have to pay back what you owe.

So what is a margin requirement? Every security, including stocks, can have a margin requirement, which is the minimum percent of securities investors must pay for with their own money. The important type of margin, for this example, is initial margin, which applies to any initial purchase of a security.

To better visualize this, imagine you have $3,000 in free cash and equity in your margin account. You want to buy as much of a stock as you can, and the Federal Reserve dictates the initial margin is at least 50%. This means 50% of your initial investment can be money you borrowed. You don’t have to borrow that much, but you can’t borrow more than 50%.

Calculating buying power from the initial margin is simple. If 50% of your buying power is $3,000, then your total buying power is $6,000, in the form of $3,000 in your own wealth and up to $3,000 of borrowed money. Basically, a 50% initial margin means the broker is willing to match your cash investment in the stock equally, but no more. In this case, you could also say you have two times buying power.

Buying Power and Leverage Trading

Leverage trading is a broader term for what we described above, covering all forms of borrowing money to acquire a bigger position on a security. The more profitable stock you can buy, the better when you sell it, right? So why not borrow as much money as you can? Well, the obvious risk is you miscalculate that stock, and it isn’t as profitable as you thought it would be. Or, perhaps you pull out at the wrong time. Any number of things could go wrong. Leverage trading, including buying on margin, is very high-risk.

However, just because your buying power is at a certain level doesn’t mean you have to buy in at max power. Instead of taking advantage of the 50% margin available for a stock, you could only take, say, a 5% margin. So if you invested $100 in the stock, only $5 would be borrowed and the other $95 would be your own money.

Keep in mind that margin accounts usually have rules preventing you from being too timid. Things like minimum deposits and a certain net worth serve as boundaries for whether you get to open and/or keep your margin account. They are for bigger-scale investors willing to take risks with borrowed money. It’s generally best for beginners to stay away from leverage trading initially, even if you have the funds to risk it.

Buying Power and Day Trading

If a brokerage account makes more than four day trades in five days, it qualifies as a pattern day trading account, in which case the buying power rules change. First, normal margin accounts typically require a minimum equity of $2,000. If this isn’t met, the trader gets a margin call, a demand from the broker to deposit cash or sell securities to make up the difference and reach the minimum equity again. Pattern day traders have a much higher minimum equity for their accounts: $25,000. Therefore, a big loss could lead to a nasty margin call.

That’s just the beginning, though. Instead of the 50% initial margin, day traders get a 75% initial margin. In other words, the trader only has to fund 25% of the investment at most, meaning he or she has four times buying power. Think of it as more room to borrow money in exchange for running a more volatile, frequent, and rich account.

Let’s put this down in solid numbers. If a day trader has $100,000 of total wealth in their account through cash and equities, they could borrow up to $300,000 if they risked it all on a trade. The total buying power is four times, adding up to $400,000.

What Does Option Buying Power Mean?

Option buying power differs slightly from stock buying power. First, options are not like stocks in that you can’t buy them on margins. So toss all consideration of borrowed money out the window. The only thing that matters with option buying power is the total amount of cash and equity in the account that you can allocate to options.

When you buy stock options, you have to be able to pay the premium if the deal ends up not being profitable. Options are more complicated to calculate for this topic, and more variables can change, but basically, you need enough buying power to cover the option’s entire cost.

What Happens if I Don’t Have Enough Buying Power?

Naturally, if you want to buy $10,000 of stock with your account but only have $4,000, you simply won’t be able to buy that much. If it were a margin account, however, and you deposited another $1,000, then you’d have $5,000 total and could get double that through financing, bumping you up to $10,000 in power.

Buying power is an important metric for someone making big trades to watch. For rich investors with secure positions in life, making a huge trade with the potential to lose tens of thousands of dollars or more might not be that big of a deal.

Most investors, however, especially those dealing with plain cash brokerage accounts, don’t need to worry about the terms and rules related to borrowing money for big trades. Margin accounts could be worthwhile later if you scale up your portfolio and wealth to a degree that you’re comfortable taking the risks, but they are typically not for beginner or intermediate investors.

Balance Risk and Reward When Buying Stocks

Investing your own money in the stock market is usually enough risk for most people. Some open margin accounts and borrow money to make bigger plays, but you have no obligation to do so, and if you’re like most people, it’s either impossible or impractical. If you are interested in margins and buying power, however, it’s critical to know their rules and limits to avoid getting a deep margin call.

So, you want to be a day trader? That sounds like a great idea, but you definitely need to have a strong understanding of the rules and regulations that apply to day trading. Small traders might find the Pattern Day Trader rule (PDT rule) to be a major restriction when trading.

So, what can be done about it? This is exactly what this article will show you. We will see some different stock trading strategies, and discuss the merits of each to help you decide which route you should take.

What Is a Day Trade and How Does Day Trading Work?

Before getting into the PDT rule, let’s talk about day trading. A day trader uses price movements of a stock within the day for both long and short trades. They close their trades before the trading day ends, and don’t keep their positions open overnight. They typically work by examining stock prices and entering and exiting at a rapid pace to earn small profits along the way which can quickly add up. If a day trader purchases a security and doesn’t sell it later that same day, that isn’t classified as a day trade.

As you can guess, there are no statutory requirements for someone to be called a day trader. It all depends on the number of times you trade, or the trading duration.

As you can guess, there are no statutory requirements for someone to be called a day trader. It all depends on the number of times you trade, or the trading duration.

What tools does the day trader use?

A day trader spends a lot of time using technical analysis techniques every day. They’re exceptionally good with technical analysis, and have an inherent ability to manage stress well.

Day traders are mainly into analyzing price action — the movement of the stock price as a function of time. Since there’s a lot happening by the minute, the day trader has to stay on top of the trends as stock price varies. They can do this through various platforms.

What Is FINRA?

FINRA is the Financial Industry Regulatory Authority. It’s a not-for-profit, government-authorized organization that oversees all U.S. brokers. Their work is to ensure a fair financial market and protect investors. FINRA oversees more than 600,000 brokers across the United States, using artificial intelligence technologies to keep a close eye on the market.

Pattern Day Trading and the PDT Rule

Though similar, there is a difference between a day trader and a pattern day trader. A pattern day trader is a designation given to traders who day trade at least four or more times during a period of five business days. Their day-trading activities must also exceed 6% of their total trading activity for this same five-day period. If you don’t meet this requirement, the brokerage firm you are associated with can recognize you as a day trader.

Thus, a pattern day trader is a day trader with an additional requirement on the number of day trades that must be met to qualify. This is where the PDT rule comes in. Implemented in 2001, the PDT rule helps reduce day trading risks. Here’s an in-depth look at the rule:

• Once a day trader is deemed a pattern day trader, the FINRA requires them to have a minimum amount of $25,000 in their brokerage account at all times. This is where trading activity occurs. It’s not essential for the entire $25K to be solely in cash as a combination of cash and eligible securities is also acceptable. This requirement helps reduce the risks that are inevitably linked with day trading. Having an account like this also gives you more buying power.
• FINRA clearly states that this is the minimum equity that must be maintained before day-trading activities can commence.
• The moment the equity falls below the $25,000 mark, the pattern day trader will have to abstain from any day trades until the time the account has sufficient balance.
• Brokers usually lock the account of the day trader as soon as the PDT rule is violated. Each broker has its own lockout period which could last from 1 to 4 months.

The PDT rule was initiated for protecting the interests of new traders who could easily mess things up if they aren’t careful enough. Prior to this, there wasn’t a rule to protect inexperienced traders in the day trading space.

The PDT rule was initiated for protecting the interests of new traders who could easily mess things up if they aren’t careful enough.

This equity requirement can make things complicated for small traders who do not have an account with $25,000. Such traders can only undertake 3 or fewer day trades in a 5-day period.

Read our page on technical analysis tools such as Bollinger Bands which has remarkable insights that you can use when trading.

Consequences of Violating the PDT Rule

If you’re in violation of the PDT rule, there are some consequences you may have to face. The consequences you receive will ultimately come down to your broker. If this is the first time you’re in violation of the rule, your broker may go easy on you. Regardless, you’ll probably be flagged as a pattern day trader so your broker can supervise your future activities.

In other cases, you may have a minimum equity call, which means you have to deposit enough money into your account to get it back up to $25,000. Until you do, you probably won’t be able to trade for 90 days. Other consequences may include you having to close out your positions or it may involve the suspension of your margin buying power.

How to Get Around the PDT Rule

Getting around the PDT rule legally isn’t as difficult as you might think, especially if you know the right strategies. Here are some workaround methods:

• Restrict the number of day trades. This automatically disqualifies you from the PDT rule.
• Open multiple accounts with different brokers. You can then undertake multiple day trades within a 5-day period. In addition, each account gives you another three-day trader per five-day period. With this option, you can open any number of $100 accounts with different major brokers. However, there’s a catch — you need to arrange to file your taxes accordingly if you have multiple accounts. Even though this technique is perfectly legal, you might have to put more time into tax preparations.
• Consider swing trading. Swing trading involves maintaining your position for a time frame spanning more than a day. The holding period can last from a few days to weeks. This is not only a way to avoid the PDT rule, but will also keep the stresses associated with day trading at bay, and may be a more lucrative option to consider. This is not to say that swing trading is less risky, though!
• Join a proprietary trading firm. Three types of these firms include leverage stores, a mentor-based firm, and professional firms. Leverage stores extend you more leverage. Mentor-based firms want people who are passionate about trading and they require savings or other income. Professional firms, on the other hand, hire people with advanced degrees and tend to pay a salary along with a profit split. Joining a proprietary trading firm is best for undercapitalized traders who are invested in trading.
• Choose a foreign broker. Many foreign markets have less strict minimum equity requirements than the US.
• Use a cash account.Though this helps you avoid the PDT rule, it’s important to know that day trading in a cash account is typically prohibited. A way to get around this is to ensure that the Regulation T of the Federal Reserve Board, particularly the free-riding prohibition, is not violated by the traders, in which case day trading using a cash account is permissible.
• Trade in a different market. Consider the forex and options market, for example. The capital requirements of many markets could be significantly lower.

While each of these approaches can help you determine the best method for trading without the PDT rule, they come with their share of pros and cons. I’d like to draw your attention to the suggestion of swing trading, in particular, and other trading styles to get around this rule. In the next section, we will explore these trading styles in more detail.

Worried About the PDT Rule? Consider This Trading Strategy

We discussed how swing trading is a great way to bypass the PDT rule in the previous section. Swing trading is a strategy in which a trader will hold onto an asset for typically several days. The idea is to make profits when the price moves favorably.

Swing trading is a strategy in which a trader will hold onto an asset for typically several days.

As you can see, a swing trader holds his assets for a longer time frame compared to the day trader. However, unlike an investment strategy that buys and holds for several months or even years, swing trading does so for months at the maximum.

Swing Trading and Penny Stocks

You should also consider swing trading penny stocks, which are cheap and hold interesting possibilities. Penny stocks operate in volatile conditions, which opens a whole new world of opportunities for swing traders who can realize massive profits in a short interval of time.

Penny stocks are usually considered to be those that are valued at or below $5. This lets you buy a lot of stock at low prices. These are typically issued by small companies and can be very promising indeed. Of course, penny stocks carry risks since there is a degree of speculation involved. Look out for penny stocks that have good volume, and fewer outstanding shares.

If you are a new trader exploring swing trading, then penny stocks might just be a perfect choice. They’re also a great way to make profits without being bound by the PDT rule.

Final Words

The PDT rule requires qualifying day traders to maintain minimum equity of $25,000 to be able to make more than four trades in a five-day period. However, many small traders, especially those just starting out, might find their trading activities being limited as a result of this rule.

There are several ways to bypass the PDT rule, as I pointed out above, and you should consider swing trading as a great alternative to make profits. Offshore brokers might also be worth considering. A simple way that does not involve any complexities is to limit the number of trades.

Whichever option you go with, check out the RagingBull page on technical analysis tools which shows you how you can use these tools when creating a profitable trading strategy. Technical analysis is a powerful skill that every trader – beginner or professional – should master.