Using penny stocks to hedge your portfolio may be a more viable option than you think.  Traditional
    hedging typically involves using complicated options or derivative securities, and doing it yourself may
    require opening margin, options, futures, commodities and foreign exchange accounts.  All hedging
    practices consist of one simple theory, however, and that involves the concept of insurance.  Hedging your
    bets is a way to help insure that you will be covered if things do not go as planned.  Using Penny Stocks,
    one can often hedge a much larger portfolio while risking only a tiny percentage on low priced shares, and
    be able to do it with ease, right from an online brokerage account.  Exchange traded funds, or ETF’s have
    emerged as a way for the average investor with a stock trading account to buy baskets of securities in
    different economic sectors or on different exchanges.  This can be a way to hedge your investments without
    opening up any new accounts; unfortunately several problems with this practice exist.

Let’s say you’re heavily invested in bank stocks, and you want to ensure that rising interest rates do not
destroy your portfolio.  You believe that bond funds will do well in this scenario, and you decide to sell half
of your bank stocks and buy a treasury bond ETF.  If you are right, you will ensure that no matter what
happens to interest rates and bonds, your account value will likely stay right where it is.  If you are wrong,
however, you may be worse off then when you started.  By using penny stocks, you can still make out if your
major investments continue to perform, and if they falter, you may still make out.  In the above example, let’s
say you believe that if rates go up, then repossession specialists may do well.  You find a tiny public
company that specializes in asset recovery for banks and financial institutions trading for just pennies a
share.  You sell just 10% of your bank stocks and buy shares in the Micro Cap Company to hedge your
portfolio.  If you are right, and your bank stocks fall by 20% on rising rates, your penny stock could easily
double or triple on accelerated revenues more than making up for your loss.  If rates stay low, and your
bank stocks rise another 20%, your original 10% invested in the high risk penny stock is all that has been
risked.  If you are completely wrong, you have at least kept the risk down, and have not accelerated any
losses in your portfolio.

You don’t have to be a major player in the world’s financial markets or be millionaire to enjoy the benefits of
hedging.  Take a look at your own job and your plans for retirement.  Maybe you are heavily invested in your
own company’s stock options, or maybe your job and salary hinge on the profits of your business.  You may
work for a company that buys coffee beans, and then roasts and sells them.  You know that your livelihood
may hinge on the fluctuations in commodity prices, specifically the price of coffee beans, and you are aware
of some threats that could send prices higher.  By selling a small percentage of your stock options or even
by allocating a few paychecks you could buy shares of several different penny stocks poised to move in
your favor in the event of these known threats.  These may include tiny companies selling pesticides to
harvesters in the event of an epidemic, a company that delivers water in case there is a drought or other
natural disaster, or just a company that sells unroasted beans who will experience better margins in the
event of sustained higher prices.  Any one of these stocks could skyrocket during tuff times taking a lot of
the pressure off.  If business remains good, you have not risked more than the small percentage of your
assets used to buy the penny stocks, and chances are they won’t be completely worthless.

           The concept of using Stocks under a dollar to hedge is not limited to just insuring investments.  You
    can bet against rising gasoline prices, heating oil and propane or natural gas prices, electricity bills, food
    and even real estate prices to name a few.  Let’s say you have a long commute to work, and you
    understand that a one dollar increase in a gallon of gas will translate into a thousand dollars extra spent
    per year in transportation costs.  By putting a few hundred dollars into the stock of a tiny gasoline refinery
    company trading on the OTC Bulletin Board, you can hedge your commute so to speak.  Timing is
    everything, but finding a stock with just the right capital structure could yield triple or even quadruple digit
    profits in the event of a one dollar spike in the price of gas. If gas stays the same or goes down, you have
    only risked a few hundred dollars, of which is made up by the lower transportation costs.  The main thing to
    remember when hedging is that if the event or catalyst that you need to insure has already occurred, then it
    is too late.  You must place the most emphasis on hedging your portfolio specifically during periods of
    affluence and prosperity.
    Hedging with Penny Stocks
    PSW Staff
©2010 Penny Stocks Weekly  -  Home  -  PSD 10  -  Terms  -  A Message From The SEC  -  Important Information On Penny Stocks
Free, unbiased analysis & opinion on small & micro cap stocks
You need Java to see this applet.
    Enter Symbol, Company Name or Keywords:
    Learning Center
    Free Premium Subscription Offer

    Full article access includes Buy, Sell & Stop-Loss conditions along with a no nonsense
    trading strategy.  Don't jump in blind, subscribers also get a detailed risk analysis,
    suggested position weight and time horizon ideas.  Also access our Small & Micro Cap

    Get started for free right now with our weekly newsletter.