Free-rolling Pennies

Free-rolling Penny Stocks

I’m borrowing a term from poker to make it easier to explain this concept. In poker a player who cannot lose “his own money” is said to be free-rolling. For example, that player entered a game with $100, and won $300 to have $400. If he takes his original $100 off the table, but continues to play with the $300 he won he can’t lose his own money, but he has the potential to win a lot more, although he can still lose what he won. This player is said to be free-rolling.

Now, you might be wondering what that has to do with penny stocks, but you probably already figured it out. If you own a lot of shares of a penny stock, and its price moves sufficiently for you to sell half or any part of your position, and take all of your original money back out of that position, you can hold the rest for as long or short a time as you like and stand no chance of losing more on that position than you put into it. To some people this sounds like a good idea, and it can be a very good risk management strategy, you have limited your downside risk to profits made, but you have also reduced your upside potential. For this reason “Free-rolling penny stocks” should only be used in certain situations. If you have a position you have real faith in free-rolling will actually make you less money than holding all your shares. If you have made a big profit and you are pretty sure it is running out of upside potential, selling it all will probably be the way to make the most money.

But, when you are in a stock that is behaving erratically, or cannot be predicted, especially speculative plays where there is a lot of hype in the market, this can be the best way to both hold onto a chance to make money while insuring that you are not going to lose money. It is also a good way to build a long hold portfolio without having a lot of cash. You use “your money” to buy stocks you might like to own for months or years, and wait for them to make an upside move enough t o get “your money” back out, while holding the rest in hopes of future gains. This type of strategy can be very popular with margin players to leverage themselves into a variety of positions while building a portfolio of a number of stocks. Unfortunately, in penny stocks, the value of the portfolio is not as solid as I, personally would like it to be to base a margin account upon.

I only trade pennies with cash. I use the “free-roll” strategy in a few specific situations dictated by market conditions and my opinions about a specific stock. I offer it here merely as something to be aware of, think about, and consider as a possible option when making difficult buy, sell, or hold decisions.
Just like in poker free-rolling penny stocks sounds good, but, just like in poker, if you have made money it is now all your money, and if you lose what you made, you have still lost money that you could have kept. However, there are times when risking your profits while insuring against loss makes good sense. Such a strategy should be used with discretion, but it does belong in the tool bag of the savvy penny stock trader.