Replies to post #16337 on Titan Pharmaceuticals Inc (TTNP)

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Shorting Stocks Under 5 Dollars
Most brokerage firms will not allow you to short stocks under $5 dollars, because they fully understand the risk involved. However, there are a few brokerage firms that will allow you to do so.

The reason you should not short stocks under $5 dollars is very simple. In the event that you are wrong and you somehow select that high flyer accidentally, you could be wiped out. What I mean by this is since these stocks often move sharply in one direction, you could face a number of gap up days that could completely erase your account balance and have you owing money to your brokerage firm.

While the odds of this happening are slim, this is something you can not afford to happen even once. So, let’s take a look at another real-world example of when a penny stock can start taking off.

This ia info from the stock PLUG. PLUG hit a yearly low of .12 cents in February 2013 and then had a number of rallies and pullbacks until it finally started to quiet down at the .70 cent range. Now at the time PLUG could have given you the impression that it was topping out for the third time around the .70 cent region and was set for a pullback. Assuming you could actually find a brokerage firm or prop firm that would allow you to short PLUG, you literally could have been wiped out in a matter of 2 days as the stock ran from .80 cents over a $1.60.

Really High Maintenance Requirements
Beyond the real possibility you will be unable to short stocks under 5 dollars, there are really high margin maintenance requirements for holding high-risk stocks. For those of you unfamiliar with maintenance requirements, your brokerage firm assesses the volatility and perceived risk of a security and places a requirement of the amount of cash you are required to maintain in your account at all times. If you dip below this cash requirement, your brokerage firm is within their right to liquidate your position at market.

These margin requirements can range from 50% all the way up to 100%. This means that if you use margin your borrowing power is reduced significantly. Which begs the question, if you feel there is more money in trading the cheap stocks, yet you can’t use all of your available trading funds, what is the point?