Penny Stocks For Dummies
Overview
Want big returns? Look at small stocks!
Penny stocks are low-cost equities that often make large price moves, potentially leading to big gains—or losses—for investors. Penny Stocks For Dummies will help you determine whether this wild ride is right for you. With this hands-on guide, you can grasp the basics, find smart investments, avoid scams, and look for big success, even if you only have pocket change to start out with.
This latest edition takes you right into today’s unique penny stock market. You’ll learn how to read penny stock charts, evaluate the strength of small companies, recognize price manipulations, and use smart trading strategies to maximize your returns. Buying and selling penny stocks can be extremely lucrative—if you know exactly what you’re doing. This book will make a penny trader out of you, so you can start making money for the future. (Heads up: you’re going to need a bigger piggy bank!)
With Penny Stocks For Dummies, you will:
- Find out whether penny stocks are a good fit for your investment goals, available capital, and risk tolerance
- Do your due diligence and learn how to research potential penny stock investments
- Use fundamental analysis, financial ratios, and penny-specific technical analysis to identify winning bets
- Uncover expert tips that will boost your results and help prevent big losses
Penny Stocks For Dummies will give you the knowledge and confidence you need to get in on the ground floor and discover those hidden gems for high rewards.
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About The Author
Peter Leeds, also known as The Penny Stock Professional, is the publisher of Peter Leeds Penny Stocks, a popular financial publication with over 50,000 subscribers. He is also the author of Invest in Penny Stocks.
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CHEAT SHEET
Many excellent companies trade as penny stocks, and investing in those companies as they “grow up” to become bigger stocks can be extremely lucrative. Unfortunately, penny stocks have been given a bad name among the investment community, and in some cases, that negative reputation is well deserved. But after you discover a few tactics for sidestepping the easily avoidable pitfalls in penny stocks, you can uncover incredible companies that will turn a small investment into a significant reward.
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Stocks
Although the share price of a penny stock is often dictated by the results of the company's financial reports, those financial results are ultimately derived from operations. You need to pay close attention to a company's operational factors and related concepts when making your investment decisions. The following ten key concepts can have a major impact on the success or failure of a company.
Some realities in the stock market aren't common knowledge even though they should be. With an understanding of the ten trading truths revealed here, you'll make timely buy and sell decisions, bring greater clarity to your research, and reap more rewarding returns.
Investor sentiment is contrarian
Stock prices change based on the buy and sell decisions of the masses, and a cold, hard fact is that the mob (the majority of investors) is usually wrong.
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By applying the following ten rapid result tactics to your investment strategy, you will have a better understanding of what is moving the prices of stocks as well as a deeper knowledge of the wares a company is producing and selling to the masses.
Call the company
One of the most important things you can do when considering whether to invest in a company is to pick up the phone and call it.
A penny stock is a small company's stock that trades via over-the-counter (OTC) transactions for less than $5 per share. A few consistent traits often indicate that a penny stock has a bright future ahead. You can use these hints to assess a stock quickly, and they can serve as valuable analysis tools for investments of any size.
The concept of Bitcoin was not directly tied to penny stocks at first, but penny stocks are quick to become the perfect vessel for any investor stampede. And people jumped on the Bitcoin bandwagon in droves!If you don't fully understand Bitcoin, don't worry — most people don't. But even without proper knowledge, thousands will still pile into a good investment mania when they see one!
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Technical analysis (TA) isn't just about spotting a bullish indicator but also knowing when that indicator still applies and when the pattern is breaking down. The moment when a TA indicator breaks down, it no longer provides any clues as to future share price direction.Even when TA indicators play out exactly as you had hoped and predicted, their impact will only be temporary.
Every publicly listed company has an investor relations (IR) contact (or contacts) who can tell you about the corporation and answer any questions you may have. Many penny stocks make the CEO or other top management available for investors as well. Contacting one of these company representatives is the absolute best way to find out more (and quickly) about a specific company and supercharge your investment results.
The purpose of a business is to make money. The corporate financials tell you exactly how much money a particular penny stock is, or isn't, making. They also show you many other important things, such as how much debt a company has, its asset levels, and the sales growth of its various divisions.Assuming that a penny stock you're interested in trades on a respectable exchange, the company must regularly and honestly report its financial results.
When you find a penny stock that exhibits the following characteristics, you may have uncovered an investment that will grow in value for the coming months and years:
Growing market share in an expanding market.
The shares represent compelling value at current levels compared to other stocks in their peer group when based on financial valuation ratios, such as price-to-earnings or price-to-sales.
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Every publicly traded stock has an obligation to provide reports of its operational results. Unless you're dealing with very unprofessional or low-quality markets (and you're not, are you?), reporting of the financials will be mandated by the exchange and be issued on a quarterly (three month) basis.For example, if a penny stock's first quarter runs from January to March, it will report the total results for that period as its Q1 release.
It was a matter of time, and it didn't take long. If investors heard the word Bitcoin, they were buying whatever 5¢ penny stock was involved. It didn't matter what the business was actually planning on doing, who the CEO was, what the company's financial position looked like, or how ridiculous the concept.Can you blame the opportunist penny stock company?
Whether you first screen your penny stocks by using an automated screening tool or just hear about an interesting company on the news, you absolutely must perform manual due diligence on any potential investments. This means taking each individual company, one at a time, and reviewing it from head to toe.Because this is the most time-consuming aspect of any research you'll perform, drop any company from your review as soon as you realize that you won't be investing in it for any reason.
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Your contact at the penny stock company will usually (but not always) be very optimistic for the company's prospects. Take her hopes and expectations with a grain of salt. Instead of trusting everything she tells you, try to delve into her answers to glean what she is really saying.If she says that the penny stock company is growing rapidly, but also says that the headcount is half what it was a year ago, then something does not make sense.
With any stock, most of the significant price moves occur over very short time frames. Although a specific penny stock may trade within a small and predictable price range for months, those same shares may suddenly multiply in value over the course of only a few days or weeks.
In more extreme cases, the shares of a penny stock may trade sideways for as long as a year or more, only to quintuple within a few hours.
Message boards, or chat rooms, are forums where anyone can add their own comments to the discussions. For example, you could visit a message board where participants are talking about a particular stock and jump right in with a bunch of made-up facts for everyone to see, and potentially believe.
Message boards are often full of misinformation and blatant lies.
Stocks
Most publicly traded companies are mandated by their stock exchange to have an investor relations (IR) representative. IR reps help attract prospective investors, and an increased number of investors generally translates into higher stock prices and a broader shareholder base.One of the responsibilities of IR reps is to answer any questions that shareholders have about the company.
Pay attention to as many media outlets as you can as you perform your research on penny stock companies. Often you can find reliable articles discussing the specific penny stock you're interested in, while other times you'll find information that gives you a better understanding of the underlying industry, the company's competitors, or important shifts in social trends.
In some cases, a penny stock company will pay an analyst to produce detailed reports about it. While these reports can often be very professional and thorough, the fact remains that the company is paying the analyst for the review, which automatically casts a shadow of doubt on the value of the information.
The purpose of these paid analyst reports is to push the share prices higher, but instead of trying to pump up a stock through manipulation, these reports make an argument for why the shares should trade higher and that argument often has a great level of detail.
Press releases can come from various sources, but generally the companies themselves issue them. You can glean a great deal of information from the press releases that a company puts out, but like everything from a biased source, take what you read with a grain of salt.Remember that companies issue press releases to announce positive events.
In penny stocks, a picture is worth a thousand words. Trading charts display a penny stock's price — and usually trading volume — over time, in chart format. You can choose the duration of time and see how the price performed over a day, week, months, a year, or even longer.You can view trading charts for free from your broker and on numerous websites, including Big Charts, and the financial websites referenced in the preceding section.
Penny stock newsletters can be a great way to get ideas and guidance on low-priced shares. These resources are almost always provided online, whether through email alerts or a website, although a few send out printed newsletters or faxes.In most cases, the service or website simply asks for your email address, and then they start bombarding you with frequent "hot tips" about penny stocks they claim are going to explode in value.
Many excellent companies trade as penny stocks, and investing in those companies as they “grow up” to become bigger stocks can be extremely lucrative. Unfortunately, penny stocks have been given a bad name among the investment community, and in some cases, that negative reputation is well deserved. But after you discover a few tactics for sidestepping the easily avoidable pitfalls in penny stocks, you can uncover incredible companies that will turn a small investment into a significant reward.
Stocks
Like all investments, penny stocks can be impacted by investor stampedes. One of the first documented investor stampedes was not even related to the stock market, but that's the point — this is not a stock market issue, it is a human psychology issue.In 1637, in the Netherlands, the people got caught up in a speculative frenzy related to tulip bulbs.
There have been many cases of penny stock manias throughout the decades. One of the most recent and significant manias surrounds the growing acceptance of marijuana.Medical marijuana has been a growing trend for years. However, the social movement for medicinal cannabis has been slow, and limited to small percentages of people with specific illnesses that may be helped by cannabis.
Stocks
Investors who aren’t aware of the best ways to protect themselves from the risks of investing in penny stocks can sometimes get burned. But if you abide by the following pointers, you’ll be able to sidestep the vast majority of the low-quality investments, scams, and misleading information:
Avoid the lower caliber markets (Pink Sheets, OTC).
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You will get the best results from your phone call to a penny stock company if you ask the best questions. Avoid dead-end and vague queries, and instead ask focused questions that require the contact to answer with specific, detailed answers.Some examples of great questions that you should ask management or IR personnel include the following:
What is the current headcount at your company?
People typically continue to do what they've always done, which means that, barring any widespread shift in human psychology, there are more stock market manias to come. Specific factors ensure future investor stampedes, just as there will be predictable outcomes when such events inevitably arrive.
Why the next mania plays out
As long as people get motivated by certain specific factors, they'll fuel the next mania.
Stock quotes tell you at what price the shares most recently traded. More important than knowing the latest price is to keep an eye on changes in price by tracking stock quotes over time.For example, a stock quote of 50¢ per share only tells you the price at which the stock most recently traded. But if you also know that it traded at 25¢ the day before, you know that the shares have doubled in a short time.
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There are ways to win in a trading stampede, and they're all about timing. Successful investors recognize when the trampling masses are driving higher and anticipate that sudden moment where the mob shifts, reality sinks in, and shares plunge.
In penny stocks, this is the greatest game of hot potato you'll ever play.
Stocks
Investors rely on five categories of financial ratios. Within each category are several calculations to measure the various aspects of a business. You can use each of the following main categories to analyze any type or size of stock:
Liquidity ratios: Also sometimes called "solvency ratios," these calculations demonstrate a company's ability to pay its short-term debts and obligations.
Small businesses are the source of the majority of economic growth in the United States, and this is probably true in most nations worldwide. In addition, the small-business sector is America's largest employer.When small businesses need to raise capital, they often go public by listing stock on the market. Some of these companies are tiny, or just getting started, and their value is still low, so they often trade as penny stocks.
Maybe the dot-com bubble was more severe than it otherwise would have been because it occurred over the turn of the millennium. This bubble inflated from the year 1995 until it popped in spectacular fashion on March 10, 2000.The media was already driving the idea of the advantages the Internet would bring the world.
Investor manias are not going away. They've been around for hundreds of years, and they'll be around for thousands more. As long as people want to jump on a trend that could make them rapid money, and as long as they feel competitive when their associates are cashing in, you'll see more penny stock stampedes.Investor manias have now become perfected, due to
Speed: Information can flow at light speed now, and that really fuels the penny stock manias from the beginning to the peak.
Stocks
You can practice trading in real penny stocks, and in real time, without any risk to your capital. Called “paper trading,” the process simply involves investing imaginary money into real stocks and keeping track of how well your picks perform.
Using paper trading, you should get better at penny stock investing pretty quickly.
For the Peter Leeds Stock Picks newsletter, they start their analysis with the full universe of penny stocks and then eliminate huge chunks of them very quickly by imposing the following strict parameters:
They only consider American penny stocks.
They don't choose companies trading on the Pink Sheets and other inferior exchanges.
Stocks
Investors engaged in the recreational marijuana mania had forgotten an important point: With legalization and widespread acceptance of recreational marijuana, the big companies will enter the market. As soon as that happens, all tiny and marginal businesses will be crushed.This fact should not surprise anyone — this exact scenario has played out many times in the past, and larger, more established corporations have taken over smaller markets.
To understand types of trading orders and how to use them, you need to know how stocks are bought and sold. When you buy or sell shares of any type of stock, you choose between two main types of orders:
Limit orders
Market orders
Understanding the two types of orders is important for trading any type of equity, but the distinction is particularly significant when it comes to penny stocks.
When a company is worth billions, it's more insulated against investor stampedes. The larger something is, the more energy it will take to move it, and the more professional eyeballs there are focused on every detail of the business.In addition, most larger and midsize corporations have been around for decades.
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