Falconstor Software had a negative breakout as it dropped -6.88% in trading yesterday. FALC is considered a penny stock by traders because it is priced at less than $5 a share. Penny stocks like FALC are interesting investment prospects because one-day price breakouts can turn into very large drops on a percentage basis in the short term. However, before you consider shorting FALC you need to be aware of some unique challenges.
In many ways, traders treat penny stocks like a speculative position in a put option. They both represent the possibility of large unlimited gains and fixed risk offset by the fact that they are typically much higher risk than larger stocks. However, unlike buying a put, shorting a penny stock may expose you to unlimited risk if the stock reverses quickly and starts moving higher. Additionally, it is often more expensive to short a penny stock than it is to short a larger stock due to the limited number of shortable shares.
FALC competes in the Business Software & Services industry with Wipro Ltd. (WIT) [Chart - Analysis - News]—the largest firm in the industry group—and TeleCommunication Systems Inc. (TSYS) [Chart - Analysis - News], among others. We would normally expect FALC to be much more volatile than its industry as a whole, which makes a comparison to other firms in the group difficult.
If you are interested in trading penny stocks there are a few risks to keep in mind.
1. Penny stocks are typically poor performers historically—which is reflected in the low share price.
2. They can be extremely volatile and losses are likely.
3. Because small stocks like FALC are lightly traded, they can be pushed around by a small number of traders.
Source:http://www.learningmarkets.com/News-Feed/2010090844632/falconstor-software-inc-presents-short-opportunity-falc-wit-tsys.html
