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 ETFs 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.

Lets say youre 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, lets

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 dont have to be a major player in the worlds 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 companys 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 wont 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. Lets 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.