The Great Penny Stock Debate

What are Penny Stocks?

2008-05-06T09:17:00.000-07:00

Penny Stock are Small!
Stocks are defined by their market capitalisation (number of shares in issue multiplied by the value of each share). A company with 1 million shares at $100 dollars per share has a market capitalisation of $100 million.

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Listed companies are divided into groups according to size. Large Caps are the top end of the spectrum (the Google's of the world), then the Mid Caps and the Small Caps. At the bottom end you have the Micro Cap firms which will generally have less shares in issue at a lower price per share (ie. Lower market capitalisation). Penny Stocks fall into this category and generally defined as being less than $5 per share.

It is important to know that this is a relatively ‘lose’ definition because even a large company could potentially trade for less than $5 but would not be classed as a Penny Share (some banking stock during the credit crunch reported huge stock losses but would not be considered a penny stock).

Penny Stocks are generally too small or do not meet all the rules and regulations (perhaps due to financial constraints) to make it onto the larger exchanges (the Nasdaq, the S&P etc). Consequentally it is harder for them to raise money to invest in themselves. They do not have media exposure, they might be new and do not have the history and are just too small to attract the interest of Global Investment Banks looking for companies to absorb billions of dollars of investment funds.

Traded on the ‘Over the Counter Bulletin Board’ or through the ‘Pink Sheets’ Penny Stock are a higher risk investment than say large cap stock. To list on the OTCBB companies have to report financial statements but there are no listing requirements like those found on the NASDAQ or New York Stock Exchange. Penny stocks generally trade less frequently and have larger bid-ask prices.

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Why Trade Penny Stocks?

2008-05-05T09:18:00.000-07:00

Penny Stock are Value!
As a value investor you are looking for stocks that trade for less than they are worth and generally 'undervalued' by the wider investing community (eg. You are looking for a share worth $10 trading for $5). Your job is to be one step ahead of the herd and get there first.

You see most investors are like sheep. They see a good opportunity but do not have the guts or insight to invest, so they wait, and wait, and they wait. They wait so long that by the time they have summoned up the courage to invest, the share price has already shot up and they have missed out on huge profits.

They follow the herd but as a value investor you are going to find that company first and get in there before anyone else (while the share price is low) and the company still unloved and undervalued. Once the herd start to follow, it's your turn to start planning your exit and when to sell so that you can make as much money as possible and banking your profits for the next venture.

The amazing Warren Buffett favourite holding time (ie. How long you keep a share) is forever. Mr Buffett, a truly legendary investor believes in find good quality stock, a sound company that is going to stand the test of time. You should never have to sell a good holding. In an ideal world, we should all be acting like football scouts for that next big idea that will make a company a global success.

In reality (and I hate to be pessimistic) it is very unlikely that you will find the next Google, Microsoft or Apple amongst the OTCBB listings. With so little information available (and the difficulty distinguishing fact from fiction), finding those rising stars is tough and usually they will not even go to the OTCBB to raise capital. This isn’t all bad news. In fact it means you can look to profit in a much shorter space of time, take your profits and run, perhaps within the space of a couple of hours.

As a penny stock investor it is your job to identify the trends that will catapult your target stock price upwards. You exercise caution to make sure you are right and the odds are in your favour, analyse the trends and buy in for as little as possible. Now you watch and wait, planning your exit. So many people focus on the ‘buying’ of stock when it is the ‘selling’ of stock that will make or break you. Identifying an exit strategy is key component of any trader (and well covered in the Trading Master Plan).

Within the space of hours or days it is possible to double and triple your money and this is the key attraction to Penny Stocks. With a $1000 you might buy nearly 100 stock of a globally successful company and they are very unlikely to double. A $1000 spent on penny stock goes a lot further and it is much more realistic for a smaller company trading at $0.50 to double in value. That is why we trade penny stock.

This video will show the fundamental skills behind finding great stock

Pump & Dump - Penny Stock Scams

2008-05-01T14:36:00.000-07:00

Supply, Demand and Market Sentiment:
All stocks are traded on prices determined by ‘supply and demand’. In an ideal world, quality stocks would be in greater demand and trade at a higher price than lower quality stock. In reality, stocks are subject to market sentiment, rumours, media attention or even the words of a well respected, seasoned investor. This can have positive or negative consequences for the stock price.

The Pump:
Exactly that, stock prices are pumped up to unrealistic highs. It could be rumours of a new contract or profits, a newspaper column with a gleeming 'buy' recommendation or just lies that spread the investment world. Consequentally, all markets and all stock are at risk and subject to false information, spread deliberately to manipulate share prices. Why someone want to do such a thing? Easy, to make money.

One of the most common forms of market manipulation that affects Penny Stock is called ‘Pump and Dump’ an illegal activity with underhand tactics. Here’s how it works…

Leaked information and rumours start to spill across the internet, newsletters, email inboxes and forums receive a trickle of information that Company A is a ‘hot penny stock’. Glowing reports on its financial status, that it has cracked a new market and its prospects are bright start to spread. It might feature in the newspaper, on the television or an analyst might recommend it.

Investors start to pump their money into the company pushing share prices up as the supply dwindles and demand goes up. The stock price is slowly pushed up to higher and higher prices, they are Pumped Up, all on the basis of false or hyped information.

The Dump:
With shares trading at a premium, the fraudsters sell their holdings as the share price peaks, making a killing on the shares they originally bought for next to nothing. With no solid fundamentals or reason for the stocks to trade so highly the share prices falls back to realistic levels. The investors have paid a premium for a share worth next to nothing.

The final kick comes from the fact that, in this smaller market these stocks are less ‘liquid’. Unwanted and unloved the stock holders have little change of selling the stock on and are left holding them. They have essentially lost all their money.

How Big is the Scam?
The Financial Services Authority estimates that losses at £200 million per year (close to $4 million) in the UK alone. This scam is global and with so much money involved, industry spokesman believe it impossible to eradicate.

Avoid Pump and Dump Scams:

1) The Source
Who and what is the source of information. Any spam email are likely to be Pump and Dump scams. And because you do not contact the person who sends the email (you buy the stock yourself however you normally trade) the scams are hard to trace and shut down. If a broker you do not know or from an offshore location, ask yourself why they are promoting it.

2) Find out Where the Stock is Traded:
Penny Stock and Micro Caps are not traded on any major exchange. As a result, the rules and regulations around the company and the information they disclose is often limited and hard to come by. If the stock is traded on the Pink Sheets or on the OTCBB (Over the Counter Bulletin Board), then chances are it is a Penny Stock.

3) Do your homework:
Any rumours you hear or any offers to buy stock should be checked independently with your own research or through a broker you already know and trust. Carry out some fundamental and/or technical analysis on the stock. Look at media reports (always questioning the source) and see if you can verify the claims.

4) Watch for Boiler Room tactics:
Featured in the Vin Diesel film ‘Boiler Room’ – these high pressure sales tactics usually revolve around persistence and creating a ‘boiler room’ feeling. Any broker who is pushing for you to buy before the ‘opportunity of a lifetime’ passes is likely to be a part of a ‘Pump and Dump’ scam.

Remember there will always be another opportunity. Use your gut instinct, if something doesn’t feel right, it usually isn’t. This course is high recommended and has great video showing you what you'll learn.

Trading Master Plan Review

2008-04-30T16:20:00.000-07:00

The real winners in trading are those who persist and have a trading master plan.

With each and every trade you make you will become more and more successful and your returns will be both financial and emotional. Your experience will grow and you’ll identify winning stock quicker and easier. The question is how quick would like that growth to be? Do you have a trading plan to persist with? Do have you a clear cut strategy you know works and have the confidence and discipline to follow?

If your answer is no, I recommend the Trading Master Plan as it does exactly that.

Your trading success will come from a combination of knowledge and experience. The knowledge comes from choosing a good mentor, constantly striving to learn and staying one step ahead of the game. The experience is from the application of that knowledge and it is the application that differentiates the winners from the also rans.

Dave Gagne’s Trading Master Plan is a comprehensive course that takes you through the trading process from start to finish. He quite rightly states that if you’re not using a trading plan “you are gambling your money and your retirement”. You can buy into the best software or subscribe to the most expensive ‘newsletter’ going but you will never know how to pick or know what is a winning stock. This will catch up with you in the end.

Suitable for investors of all levels The Trading Master Plan covers a number of essential topics every trader must know. Starting out with the basics and foundations of trading, the Master Trading Plan progresses though to technical aspects of trading, market cycles, money management and investor psychology. I can safely say it is a comprehensive course and easy to follow (although a bit repetitive in places).

As a novice investor starting out I found 'my way' compiling notes from books, the internet, a variety of seminars (so pretty bad ones) to build my knowledge base. Boucing ideas off equally inexperienced friends and just guessing. My biggest problem was my lack of direction. I had no clear plan as I pieced different trading philosophies from different sources. It wasn't a great success. The information I needed was there but my progress (and profits) took longer to come and it was a frustrating journey.

Dave Gagne has created the Trading Master Plan for that reason exactly. It is a course that takes you through a successful and proven trading process. The course logically starts with the foundations of trading and market cycles. The Master Trading Plans progress’ into Technical Trading, covering Japanese candlesticks and Trendlines. You will learn about support and resistance in a clear and concise way and how to identify when to enter a position, how to manage that position and when to exit. Accepting that no trader is right 100% of the time there is a very good section on the use of Stop Losses so that you can ‘throw in the towel’ before any major damage is done.

One of the biggest benefits for me is Dave’s sections on Trading Psychology and Money Management. From my experience and the people I speak to, most then to focus on the technical aspects of the job but without taking the time out to look at investor psychology (their own or other traders) with no real plan and no real money management discipline. In fact, if you asked them about money management they probably would not even know what it is.

This is my favourite part of the Trading Plan because it is such an understated aspect. Too many people are trying to sell 'secrets' and this (to me) is one of them. The course explains how money management is a simple set of rules that tell you when to enter, how much risk to take when to exit. Let’s face it, buying the stock is the easy part but timing the sale is tough and Trading Master Plan takes you, step by step, though the entire process.

The money management aspects will be nothing new to any professional traders who have been using these techniques for years to minimise loses and maximise gains using these very simple rules.

The Investor Psychology section is very good, covering supply and demand principles and making sure you can ‘stack the deck in your favour’. Investor motivation is a subject that fascinates me and the Trading Master Plan teaches you to profit from the greed and fear of others while you calmly control your own emotions and make money.

The Trading Master Plan is a good course and well worth the cover price. Infact, if you learn what you have applied from the course you will earn it back many times. The fact that Dave looks to educate his readers and push them to apply and take action is the voice of experience and success. Someone who cuts the crap and tells it how it is. Slightly repetitive in parts I believe this is a deliberate attempt by Dave to reiterate the importance of key points and that word again, make sure you take action and apply. Anyone who can teach you to make one and two day profits gets a big tick from me.

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3 Step Plan to Penny Stock Investing

2008-04-30T13:05:00.000-07:00

Here's my 3 Step Plan to start your journey today!

1) Education, education, education. It might not sound like fun or quick Learn as much as possible about trading before trading. I recommend the Trading Master Plan by Dave Gagne.

2) Apply what you learn in a safe environment. Set up a demo account and apply what you have learnt, get some wins under your belt and then go live!! The Wall Street Survivor is a well established, free to play, fantasy stock trading contest. Not only can you hone your trading skills, you can win $50,000 by beating the other traders! A no brainer in my book.

3) Take a risk with the Doubling Stocks Robot predictions designed to find you stocks that double in value. Not my cup of tea personnally (although there is a good 100% guarantee).

Finally, don't let yourself get distracted by the lure of earning $30,000 in days or $1 million in months. If it happens its usually luck and nothing more (otherwise everyone would be trading - there is no unstopable winning formula). Be happy to earn a $1000 a month, that's enough to make a difference to start with. Then go to $2000, then $3000 and you will get to where you want to be.