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To Start Investing In Penny Stocks
How To Start Investing In Penny Stocks
We've all heard about the investor how bragged about his 100% or
1000% return on a stock or about the guy who made it rich by investing in small caps, undiscovered stocks that made it big. In
theory, it seems to be too easy. Invest in a couple of penny stocks, then sell them when they move up. Unfortunately, it is too easy. Too
easy to lose money unless you know what to look for.
First, lets have a look at what types of
companies trade on the OTC BB or Pink Sheets.
Stocks that no longer trade over $1 on the Nasdaq
These include companies that fell from grace (Enron). While it is
possible that they may see better days in the future, the odds are
stacked against them. Its usually best to avoid trading these
stocks. If you feel that the temptation is too much, wait until the
stock begins to rebound.
New Start Ups
Every year there are hundreds if not thousands of companies who
decided to go public. Whether they need the money to expand their
business, or are looking to cash out their equity, its a natural
progression for a company with a compelling story, and a great track
record to go public. While many of these companies will file for an
IPO, many others will start off trading on the OTC BB as a penny
Second, lets look at some tips to help the penny stock trader avoid
making costly mistakes.
Stocks listed on the Pink Sheets don't have to file annual or
quarterly statements. This makes starting your due diligence
difficult. Often, the information is sketchy at best, and typically,
its biased. You should expect a shareholder to say good things about
the company. If the company didn't have potential, they wouldn't be
holding it. Or, they might be hoping to unload their shares and hope
to talk you into buying.
Stocks listed on the OTC BB file annual and quarterly statements.
This provides some measure of financial success. You'll find most
penny stocks lose money, whether through managerial incompetence, or
research and development. The key is to identify the companies whose
management has a record of consistently making money, or at the very
least, delivering on their business plan, and decreasing expenses.
Penny Stock Newsletters
Being a writer for The Leading Source
(http://www.1source4stocks.com) puts me in a biased position when
speaking to penny stock newsletters. Here's what I can tell you: be
careful! Check the disclaimer for the amount the newsletter is being
paid to carry the profile. Are they being paid in cash or in shares?
You'll likely find a correlation between the number of shares they
are being paid, and the rating on the hype meter. Does that mean
that you should avoid any stock where the company is paying Investor
Relations professionals in shares? No. Just keep in mind that they
are selling a story, and if they sell the story to other
shareholders, they will gain. This is not a problem if you get in
early, but could be a problem if you aren't able to jump in right
Take a look at the track record of the newsletter. Have they
profiled winners? Do they state the facts, or state the hype? Do
they also offer unpaid stock profiles? If they do, you'll likely
find that they do their own research in all companies, and are
looking to ensure that they aren't passing a weak stock your way
just to pay the bills.
If a company is paying an IR professional money to profile a stock
to its subscribers, should you avoid it? Of course not. Think of the
payment as advertising. They are promoting the company, and trying
to get exposure. Like any company, the only way to get exposure is
through some method of advertising. So don't dismiss a paid profile
as hype. Keep it in the back of your mind while you are reading the
profile, but pay attention to the profile. You may find a diamond in
the rough that no one has discovered.
If you want to make money, you have to be able to buy and sell enough shares
to lock in your profit, or protect your capital. If ABC company's daily
volume is only 500 shares a day, it may take you several days to accumulate
a position worth taking. If there is bad news, who is going to buy your
shares? If the volume is low, stay away. Its not worth it. If you feel that
strongly about owning the company, consider contacting the company directly
and working out a deal.
Buy Results, Not the Story
If you buy the hype, odds are, you will end up being the last one to own the
shares, while everyone else has sold off their position. Look at a company,
take a look at what their business plan was, and confirm if they have
followed through on that plan. Were they successful? Did they bring a
product to market on time? Did the company follow through on its acquisition
strategy in the manner they set out? The hype might get you a quick pop,
however, unless you are watching your trading screen every second of the
trading day, you will miss out.
There are thousands upon thousands of penny stocks. The size of your
position should not be anymore than $2000 - $3000. While this may not seem
like much, keep in mind that its not unusual for a $0.10 company to drop to
$0.05. That's a 50% loss. If your position is $10 000, a 50% haircut leaves
you with only $5000. Keep your losses to a minimum. If the company has done
well, and you are up, either take your profits off the table, or add to your
position, and be sure to reset your stop loss so as to protect your previous
profits. Capital preservation is the key to successful trading.
Have a plan before you buy. What are your reasons for buying. What is your
exit strategy? Where is your stop loss? At what point will you take your
profit? Write down these answers before you place that buy order.
Penny stock investing can be profitable. Remember, you are taking larger
risks than you would if you were purchasing shares in a bank stock. That
risk can be rewarded with returns that you cant get with a bank stock, or,
it will be met with a large loss and a bad taste in your mouth for investing
in penny stocks.
Do your homework, don't believe the hype, and protect your capital.