Penny Stock Trading Method

If you want to know how to trade promoted penny stocks without going broke, you need to come to terms with some realities that a lot of people are ignorant of. Once you understand these realities you can then move on to what it is that you need to do and what exactly it is that you need not to do. Let’s get to the meat and potatoes of what I am trying to communicate so you can get on the fast track to becoming a successful penny trader.

Realities of promoted/pump and dump penny stocks:

-Promoters of these penny stocks often have criminal records (or they will in the near future)
-Many promotions involve money laundering
-Fake press releases are used to generate excitement about promoted companies
-People involved in these schemes do not care if investors or traders lose large amounts of money
-Penny stock newsletters that pick these stocks are compensated to do so (in most cases)
-These stocks can be halted without warning by the Securities and Exchange Commission due to fraud claims
-You can be charged hundreds of dollars to trade them depending on your broker (I will address this further below)

Now, if you are still brave enough to want to try your hand at this type of trading, I can give you a few valuable tidbits of information that will help.

What you should do to be successful as a trader of promotional penny stocks:

-Open a trading account with a broker that does not charge extra fees to trade them (Etrade works well)
-Sign up to a handful of free sites that send out these types of picks with a separate email account (I like Gmail)
-Watch these picks as they come and go for about a month (then you will realize who the good promoters are)
-Buy the promoted stocks early in the promotion and sell before the promotion reaches a peak (they usually last 1-4 weeks)
-Use limit orders to buy and sell and only buy on pullbacks (do not chase stocks as they go higher)
-Learn to benefit from real time charts and level 2 quotes

What you should not do to be successful:

-Buy the first stock you see being touted in a promotion
-Believe the hype surrounding any company that is being “pumped” (treat it as a trading vehicle not an investment)
-Put more than a quarter of your trading capital into one pick
-Advise friends or family to buy (you want Thanksgiving dinner to be pleasant, don’t you?)
-Adopt a “buy and hold” mentality (you need to get in and get out!)

Now I am not so naive as to think that you will be an expert just because your read and comprehended what I just outlined. It does take time and a bit of dedication. Ironically enough, however, trading these types of stocks can be incredibly lucrative. Once you get comfortable with them, you will find that it can be easier to succeed as a pump and dump penny stock trader than as someone who invests in companies that trade on the “big boards” such as the New York stock exchange. There may be several types of these plays that you can trade at any given time, or there can be droughts where there is no real penny stock promotions going on. The key is to stay on top of current promotions and to always be nimble with regards to your entries and exits in these types of equities.           

Penny Stock Trading Methods

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Even though stock markets are generally having a bad time of it at the moment, as an investor there is no need to panic unduly. There are several strategies you can adopt to ease the pain and to protect your portfolio in the current environment. Let’s start with a little perspective on the situation.

At the start of 2012, it’s worth looking back at 2011. There was the major natural catastrophe in Japan for starters. Then there were problems in Greece and other sovereign European states, culminating in threats to the Eurozone as well as the Euro itself – plus of course the downgrading of the US credit rating. There was no doubt that the media seemed to revel in the bad news and as bad news sells, this is sure to continue.

Certainly investors voted with their feet, as they staged the biggest retreat from the stock market in 20 years. According to the latest figures from the Investment Management Association, private investors pulled a record £864m from investment funds in November, bigger than the retreat from the crisis of 2008.

But what effect did all these problems actually have on the markets? Well, in Europe, unsurprisingly most markets ended down for the year. The FTSE 100 lost 5.6 percent, whilst Germany’s DAX lost 14.7 percent. Interestingly, Far East and Emerging Markets also suffered, roughly along the lines of Europe. Overall Emerging Markets were down 14.5%, Japan was down 14.1% and Pacific ex Japan lost 10.9% – so simply avoiding European equities was not a solution.

However, as reported in the Guardian, in the US, the Standard & Poor’s 500 index closed 2011 just a fraction of a point below where it started the year. The S&P closed at 1,257.60, compared to 1,257.64 at the end of 2010. So its loss for the year was just 0.04 point. The Dow was up 5.5 percent for the year, whilst the Nasdaq composite index lost 1.8 percent.

So the US is not looking in too bad a shape and there are encouraging trends there as well, with some improvements on the unemployment and housing market fronts. Obviously there is an election later this year so the issues of debt and deficit are likely to be put on hold until 2013, but there are at least glimmers of hope.

Away from equities, bonds did well in 2011 which is somewhat surprising as they usually do badly in times of rising inflation. Long term gilts (over 15 years) returned 24.3%, index-linked gilts returned 15.4% and all gilts on average returned 14.2%. Corporate bonds which are normally riskier than gilts returned 7.1%. Elsewhere, gold returned 25.3%.

Because of this, well diversified investors will have been cushioned from the fall in equities via their holdings of gilts, bonds and other asset classes.

So how do you keep your portfolio ticking over in these difficult times?

Well, firstly, by playing a long-game. As investors in equities know, the whole process is a long-term game, and losses are only crystallised once the funds are eventually sold. So don’t panic – and hold onto your equities.

Secondly, you should ensure your portfolio is diversified. If you have a well-diversified spread across a range of asset classes, it is more than likely that if one area goes down, other asset classes should help provide protection.

Thirdly, you should look to rebalance your portfolio. As 2011 was a fairly volatile time for markets, it is likely that the portfolios of most investors are somewhat skewed, and will need rebalancing to get back in line with their model asset allocation. This might mean selling some gilts or bonds that performed well last year, to get their portfolios back in line.

Fourthly, you should consider a focus on income. Higher yielding stocks tend to outperform low yielding stocks over the long term and can contribute towards total returns if the dividends are reinvested. In fact 2011 was a not a bad year if you invested in good quality, long-term, dividend-paying companies. According to Capita Registrars, 2011 was a record year for dividend pay-outs, with investors in UK companies getting a £67.8bn bonanza – up 19.4% on 2010. Record dividends therefore provided a real bright spot for investors in an otherwise gloomy world.

Finally, if you are still looking to invest but are a little nervous, you should consider “pound cost averaging” – the process where you invest amounts on a regular ongoing basis rather than as a lump sum. This process helps to smooth out your investment returns, as when share prices are low you end up buying more shares – but obviously fewer when the price is high. So when the market is depressed, you benefit by buying more shares, which will be good news when the stock markets rise again.

So the picture for 2012 may still look gloomy but it should be borne in mind that the markets have priced in a good deal of the problems already. Whilst the short-term could remain tough, particularly if something dramatic happens, like Greece defaulting for example, it should be remembered that on a historical price/earnings (P/E) basis, equities are now undervalued. So as mentioned above, holding on for the medium to long term would seem to be the sensible option.

A review of your portfolio also makes sense at a time like this, so if you haven’t done so already, contact your local independent financial adviser, who will be able to help you with an appraisal of your overall financial objectives and strategy.           

Penny Stock Trading Methods

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In this series of stock market tutorials I am going to teach you everything you need to know about penny stocks.

Stock market tutorials – penny stocks

There are two terms that can be used to describe these kinds of stocks, they are penny stocks and micro cap stocks. the difference between the two is that micro caps are based on the market capitalization of the company they belong too while penny stocks are based on price.

A stock with a market capitalization of between $100 – 300 million is a micro cap and a one under $5 is a penny stock. Also note that a stock that trades on the pink sheets or on an over the counter bulletin board is a penny stock.

The most important thing that you should take away from these stock market tutorials is that trading penny stock is extremely risky. There are many reasons for this but the most important are.

Lack of information – making informed decisions is the most important component of any investment strategy. Finding information about these shares is difficult to find and not very credible, additionally many of the companies that trade on the above mentioned pink sheets are not required to file with the SEC. This means that they are not as regulated as the shares on the NYSE or Nasdaq.

Lack of standards – These shares are often sold on markets (such as pink sheets or bulletin boards) that are not required to fulfill minimum standards. These standards act as a safeguard for investors and if they are absent your risk is greatly increased.

Lack of historical data – the vast majority of penny and micro cap stocks are from companies that are new or about to go bankrupt. Because of this there is little or no historical data or track record of the company; this makes it difficult to determine the stocks worth and potential.

This wraps up the first part of these stock market tutorials. In part two I will be telling you about the various scams involving these stocks.           

Penny Stock Trading Methods

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Open a trading account

Use an online broker. You have to use a broker, companies aren’t allowed to sell you stocks directly. Online brokers charge a fee when you buy and when you sell your shares – you should be able to buy/sell for around $5. Your stocks account is like a bank account, except you have to fill out more forms and likely send a copy of your ID. Be patient. Some will ask for a minimum amount to fund the account. You should set up regular “payments” to your stock trading account as electronic transfers from your bank – same as bill payments. Choose your account type based on your savings style, you could open two, one for retirement (tax deferred) and one to be able to take money out. This money is for building your nest egg, so don’t spend it! Invest it.

How much money can you make?

Traditionally you would buy shares in groups of 100, but in reality you can buy any number you want. In simple terms, if you own 100 shares and the stock price goes up by $5, you could sell your 100 shares and earn $500. Would be nice to make $500 or $1000? Again, and again, and again… If you keep investing some of your income, and taking profits, can you imagine your net worth increasing? It will take some time. Be patient.

What stock to buy

You probably know some great companies already. Great companies are well managed and making lots of money and maybe paying dividends. You might set a goal to own four or five companies of different types. Don’t listen to advice from losers. You know who they are, they’re negative and fearful, and wrong! I suggest you make a list of companies you love and start watching their stock prices. You can track them using iGoogle for example. Look at them every day, over time. If you look at their charts, you want to see the highs going up and the lows going up over time. Compare the companies with other similar ones.

There are basic statistics you want to look at, PE ratios and dividends. Pay attention and learn what these mean, but don’t let it hold you back from buying. When you’re watching your stocks go up and (yes) down, your decision to buy should not normally be while it is running up. Wait for it to go down a little, when its “on sale”. Same for selling, just because your stock goes down for a time, if you sell it just for that reason, you could lose some money. Buy low, sell high – you can do this.

Your first order

You did your homework and made your decision to buy your first stock. You’re logged in, got your quote, decided what price to bid, and how many shares to buy. Make sure you check that you have enough cash. Don’t borrow on margin to make your purchase. Make sure your money is in the same currency as the stock you buy. Don’t place an “at market price” order. Enter your own bid using an exact dollar number – your limit. Keep your bid for the day (duration). If you see your stock price going up and up, you could be overpaying if you buy it. This is the part where you have to click the button to submit your order. You feel fear. Just do it. Then you’ll feel good.           

Penny Stock Trading Methods

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How Stock Investing Works

Many stock investing experts believe that penny stocks are worthless, that investing in small cap stocks is dangerous and that investors should avoid them at all costs. This view is valid in various respects, except that by completely ignoring penny stocks, you are throwing the baby out with the bath water. Applying yourself to analysing small cap stocks through identifying excellent small companies can reward you richly. You may discover a future giant. You see, the “enemies” of penny stocks do not take into account that gigantic companies whose shares are now all time “blue chips,” once started as penny stocks.

When buying stocks you buy shares of a company. This company has decided to expand its activities, and to do that it needs money. One way of obtaining funds is to issue shares. The company has to be listed on the stock exchange, where the shares of all other listed companies are traded. Despite fluctuations, the share price of a prosperous company usually rises, but it can also drop when the company, for instance, does not show a profit. The price can also drop if the stock market as a whole has a downturn, often the result of broader economic problems, of a national or international nature. Sometimes a share gets a pounding because the sector of the market in which it operates suffers a drawback. Over time, however, the share prices of large, prosperous companies have risen dramatically, earning their shareowners huge fortunes. Today financial analysts show figures that confirm that stocks have outperformed all other investment instruments in the long term. Especially long-term investors are advised to keep a share portfolio in their investment portfolio to hedge them against inflation.

Selecting Good Stocks: Fundamental Analysis

As indicated above, you actually research the company and not the stock you are interested in. There are a number of guidelines to assist you when scrutinizing a company to determine whether it is worth investing in. The process is usually termed fundamental analysis. The greatest stock investor so far in history, Warren Buffett, uses only fundamental analysis to select stocks that meet his criteria.

We shall now discuss the criteria for selecting good stocks. Note that these criteria are applicable to all stocks. They entail Fundamental Analysis and Technical Analysis. After this, we turn to penny stocks to explain their specific characteristics and information on how to find them.

Four of the most important requirements when studying a company are:

• Product: Is the company’s product something new, or does it fill a gap in a particular niche? Is it a quality product? If not a new product, will it compete effectively with existing products?

• Profitability: Does the company make a profit and has it made profits over a period of three or more years? What do its debt levels look like?

• Resilience: How robust is the company? Does it have the potential to withstand inflation, higher interest rates, a rise in fuel prices etc.?

• Management: Is the company’s management competent? Are they people with integrity, good reputations and diligence? Do they publish financial reports regularly and on time? Do they have open communication with their shareholders? The CEO (Chief Executive Officer) plays a key role in the management of a company. Although this must be a consideration, it does not mean that a CEO with a magnificent record with one company will automatically achieve the same proficiency with another.

Selecting Good Stocks: Technical Analysis

Another method to uncover the best stocks to invest in is to use an instrument that is termed technical analysis. Technical analysis attempts to determine future price trends by analyzing factors such as previous prices, trade volumes etc. A variety of indicators presented as graphs show statistics on shares and market sectors. Using these indicators can give you an indication of the current achievements of market sectors, while also assisting you in selecting the best stocks in a specific sector. The most important value of technical analysis is that it assists you in your decision when to buy and when to sell a stock. Some of the most used technical indicators are moving averages, bar graphs, trend lines, support and resistance, volume, momentum, relative strength, overbought/oversold oscillators, and stock patterns such as head-and-shoulders formation. Since these indicators are presented as graphs, it will be necessary to consult internet websites that provide these technical graphs. To utilize technical indicators best, special stock market programs are available to assist you with technical analysis when you have become an advanced investor.

Penny Stocks

It is now time to take a closer look to arguments about penny stocks. To start with: what is a penny stock? Penny stocks (or penny shares) are similar to other shares that you buy on the stock market. The important difference is that penny shares are cheap to buy ($5 or less per share, but there is no consensus over the amount). Often new and small companies issue these shares with a much smaller market capitalization than other stocks. This explains why they are relatively cheap. Methods and techniques to select penny stocks do not differ radically from those used to pick other stocks.

Penny Stocks Versus Other Stocks

What do small cap (penny) stocks offer? Why are they a buying proposition for a small investor? There are quite a few answers. Firstly, not only are penny stocks affordable (and therefore within the reach of less affluent people), but there is more scope for their underlying companies to grow. The share price of a young, prosperous company that has proved itself over a period of more or less three years, often increases by 40%, 80%, 120% or even 400% within a short length of time. On the other hand, a so-called “blue chip” stock held by a large, established company and costing $45 per share, is unlikely to move with such leaps and bounds. Secondly, small cap stocks are often less prone to big market movements.

Admittedly there is another side to this argument as well. Let us be honest, the large majority of penny stocks are indeed worthless. One penny stock experts reckons that over 97% are complete failures. The reason for that is that the majority of small companies are duds, incapable of getting off the ground, resulting from inadequate financial resources, poor management or other problems. Therefore it is of utmost importance to find the pearls and to recognize the fly-by-night companies so that you can avoid them. In that sense it is true that penny stock investing is risky. By nature penny stocks are also more volatile than the more established stocks. However, the risk factor is not limited to penny stocks. The stocks of large companies can also be risky not only because they can fall victim to market crashes, but also when they perform poorly and prove to be a loss to big investors.

Bear in mind that the price of any share may drop as low as that of a penny share. In some cases even lower. The reasons for that do not necessarily differ from those causing the downturn of penny stocks. A number of reasons can be responsible for this, including losses made by the company, bad management or an extraordinary meltdown of a whole sector.

Where do I Find the Information?

The important point is that penny stock selection and trading do not exist in isolation. Small companies with huge growth potential and rock bottom stock prices may be identified in similar fashion than other stocks, but with more circumspection. That means you should acquire knowledge about the stock you are interesting in as well as the broad trends on the stock market at the time you want to buy. In other words, you should do your homework properly. Contrary to the notion that investing in stocks is only for experts, more and more ordinary people become interested in and informed about stocks. Nowadays there are so many stock investing guides (hard copies, ebooks and online products) that anyone can learn how the stock market operates, how to select good stocks to buy, how to manage them and why and when to sell them. To many individuals stock market investing has become a hobby.

Websites

A good place to start when gathering information about penny stocks is the internet. Not only will you find websites with valuable information about the economy in general, the oil and gold price, interest rates, inflation rates, currency values, company news etc., but also sophisticated stock investing programs containing graphs of every stock and every sector of the stock market. These programs also enable you to use the two main tools to evaluate stocks: fundamental analysis and technical analysis. When you become acquainted with analysis of company results, you can find these results in newspapers and on the internet. A number of new penny stock online programs have demonstrated astonishing techniques to uncover the jewels among the heaps of trash. Of course tons of money cannot be guaranteed; but there are customers who have reported amazing results.

Newsletters and Forums

Some websites issue free regular penny stock newsletters. These newsletters contain priceless information about companies, stocks and methods to explore penny stocks and their underlying companies. Online penny stock forums where participants discuss the merits of a product are equally useful.

Customer Reviews

Similar to penny stock forums are customers’ reviews on a topic posted on a website. In some cases the customer reviewers award ratings to the programs or books on offer. Here you can expect diverse opinions, and you have to use your own judgment to decide which reviews are more trustworthy and balanced than others.

Summary

The growing literature on penny stocks has de-mystified investors’ doubts about trying out a potential gold mine. Success with penny stock investing is not out of your reach. Start doing research on small companies with good financial results, sufficient cash and competent management. Thus, gather as much information as possible from the internet, buy and consult the best available guide(s) and get on with this profitable and highly interesting financial enterprise. It could change your life.

Written by: Jacob Brits           

Penny Stock Trading Methods

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