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Shares that Double and Halve

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-10-18 09:27.
There are stocks on the Australian Sharemarket that readily double or halve in value the short term

There are stocks on the Australian Sharemarket that readily double or halve in value the short term. Better yet, there are traded financial instruments that are linked to the volatility of the larger valued stocks which also are highly volatile. The former are simply vanilla stocks. The latter example relates to derivatives, namely warrants and Exchange Traded Options (ETO's).

There are stocks that increase their value exponentially on the exchange markets in the short term. It is not only restricted to the Australian Stock Exchange (ASX) but this effect translates to exchanges around the world. What you are looking for are the stocks that are plainly labelled as "penny dreadfuls" or "penny stocks". One of the main characteristics of these stocks is that they are cheap, usually under a dollar or even a few cents a share. They are highly speculative and they don't have much trading volume if at all. The ASX is famous for these types of shares especially in the resources arena, as they let any speculator to invest their money hoping to hit the big jackpot. When a miner or an exploration company finds more to dig, that's when you'll find their stock to escalate. If the news that the property they own or their exploration hasn't reaped any rewards find their stock slide into the doldrums. This type of stock price movement isn't restricted to resource stocks, other stocks like pharmaceuticals or even retail have their share prices jump on the back of news of any success.

Derivatives. Be warned, derivatives are risky. Risky because they require a little more know-how and experience to be used effectively. Risky because they are a double edged sword. – profits are exponential: losses are exponential. Warrants and ETO's are both traded on the ASX. The catch is that warrants is basically a synthesised market created by the market makers – the major stockbroking companies that choose to participate. With ETO's what contracts you can write or trade is limited by the trading volume.

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