Chapter 1: Introduction

Transcription

1 Table of Contents

2 Chapter 1: Introduction...3 Chapter 2: Stock Market Chapter 3: Penny Stocks Defined...12 Chapter 4: Trading Penny Stocks for the First Time...18 How to become a successful stock trader, fast

3 Chapter 1: Introduction Why invest in the stock market? The stock market has been around for many, many decades and still, not everyone is knowledgeable as to how it works and how you can actually generate profit from trading stocks. 3

4 If you have a small sum of money that is separate from your life savings or retirement plan and you have a desire to grow it strategically through investment, then the stock market is one of the best places to explore. The stock market is the hallmark of the free market economy and despite the negative press that it has incurred every time something went wrong with the economy in general, the stock market remains a viable platform for investors (big and small) because it simply works. Can you lose money on the stock market? Think of the stock market as a business a business that involves good timing, calculations and strategy, like the game of chess. The stock market is affected by the volume of trades for the day and the general buying and selling trend of the people who have invested their money in it. Like any other business, you can lose a sum of money on the stock market. That s why it s imperative that you learn more about it before you invest in any company or group of companies. Investing in the stock market is not a game even large companies can lose money if they are careless with the way they trade. On the flipside, it s not impossible to grow your money either. In fact, there are thousands of dedicated investors in the stock market who have made it their life s work to strategically generate profit every single day. What are the main benefits of the stock market? Corporations and other large businesses are able to benefit from the stock market, or the equity market, because they gain access to a much larger vat of capital without having to produce the cash 4

5 themselves. In exchange for large sums of added capital, companies grant investors shares of stock of the company itself. The biggest advantage of investing in the stock market is that you don t have to start or own a business to grow your money. You just have to invest it and trade on a daily basis and your money can grow even beyond your initial target sum. The risk of trading is that you can lose your investment if the prices of your stocks go down drastically. This is the main risk as the equity market is often volatile and things can be flipped inside out in a matter of days. However, if you re not investing millions of dollars (or at least not yet), you can still manage stock trading by using a stock trading software program at home and by studying the stock market closely, day by day. Should you start trading if you have no experience with day trading? Remember: the rock stars of stock trading all started out like you with little or no experience. You can definitely change that by focusing on learning as much as you can and by engaging in stock trading regularly. If you are wary of losing your cash in bad trades then you can practice at home by using trade simulation software. Trade simulation software makes use of real-time stock information so you can trade without running the risk of losing money in the real world. These trade simulation applications are excellent for first time stock traders as they can practice what they learn and they can do so at their convenience. 5

6 Once you re ready, you can find a stock broker and you re all set to trade. Note that there are no guarantees when it comes to the stock market but at the same time, you re entering one of the most level and equalized playing fields in the economy. Your outcome will be entirely up to you and the strategies you will be using to create profit. Assumptions: This ebook assumes the following: 1. That you are interested in learning about the basics of the stock market. 2. That you want to know more about how you can trade microcap stocks or penny stocks. 3. That you are using this ebook as a general reference only and not as a source of financial advice. Please trade at your own risk. 6

7 Chapter 2: Stock Market 101 7

8 How does the stock market work? Before we dive into microcaps or penny stocks, it would be helpful to explore the basics of the stock market, or equity market, first so that you understand how penny stocks fit into the equation. When a company like Facebook decides to go public, the company gives the public an IPO or initial public offering. This is the signal to the rest of the world that the company is now ready to offer shares of stock in exchange for capital. There are two main ways that a day trader can make money from the stock market. How can you make money as a day trader? First, you can make money when the company whose shares of stock you own is doing financially well or is generating large profit from their day-to-day operations. The money that companies pay out to their stockholders is called a dividend. So when you make a profit from investing in large capital companies, you re actually receiving stock dividends. Second, you can generate money by selling your shares of stock when the prices of stock rise. For example, if you invested in 10,000 shares of Company Y at $200 per share and the price of Company Y stock goes up by 20%, you can sell your shares to capture this sudden profit emergence. You can generate profit even if you are trading stocks that have a much lower value on the stock market. 8

9 How is money lost in stock trading? Inversely, you can lose money if the value of the stocks that you were investing in plummeted for some reason. If you invested in 300 shares of Company B stocks at $25 each, you will lose money if you hold on to your shares of stock even as the value of the stocks plummets to less than $25, which is your initial investment. The main difficulty that many beginning day traders encounter is the fact that these changes in the stock market can happen abruptly. So if you re not keen and observant, you can lose money if you don t strategically buy and sell your stock portfolio to make money. Again, as I ve mentioned earlier, the stock market is not a game nor is it forgiving to careless investors. This is the main reason why I encourage people to use stock simulation programs first before engaging in actual trading so they can see for themselves how volatile and dynamic the stock market can be. If you practice with real money on the stock market, there will always be a risk that you will lose some of it or in some cases, all of it. Be careful when a website or book tells you that there is zero risk in stock trading. Every known investment instrument and investment system in the world has a risk factor attached to it. Be an informed investor! What are capital gains and capital losses? The money that you invest in the stock market is called capital. As I ve mentioned earlier, if your portfolio or collection of stocks of publicly traded companies are doing well, you make money either by increasing the total value of portfolio or by selling your stocks. 9

10 When you sell your stocks for a profit, the profit is called a capital gain. On the flipside, if the value of your shares of stock go down uncontrollably and you weren t able to put a stop order on it, you would eventually have to sell your shares of stock for a capital loss. How is the stock market designed or structured? Essentially the stock market is split into two main divisions: the primary market and the secondary market. The big players (the ones who trade millions of dollars at a time) usually conduct their business directly with banks. A big player can either be a private organization or a corporation trying to augment its capital by strategically buying and selling stocks of other companies. The banks themselves are investors in many cases and they too monitor the stock market for fluctuations and changes. When a company first goes public with an initial public offering or IPO, the big players or institutional investors flock to the banks to purchase large quantities of common stocks. Further trading of remaining shares of stocks is conducted in the secondary market, which is the stock market, like the New York Stock Exchange. The US stock market has been around for a long time and fortunately, stock trading has become very convenient nowadays because of the validity of electronic exchanges. Before the advent of the electronic age, people traded with slips of paper and communication was mainly through telephone calls between stockbrokers and investors. 10

11 Now you can create your own little office at home and monitor the performance of your stock portfolio by using any of the widely available stock trading programs available on the Internet. Due to the volume of corporations and smaller companies that are offering their commonly traded stocks to the stock market, the stock market has been segmented for easier monitoring and comprehension. The stock market has major performance indices such as the Down Jones Industrial Average. These large indices are computed daily so that investors can have an idea as to how groups of companies are faring. Trends can also be computed based on the computations presented by the major indices. Understanding trends is extremely important for first time investors in the stock market. If you cannot understand the major trends in major segments of the stock market then it s imperative that you study the market more before investing any large sum of money. This extra step is necessary to protect yourself from preventable capital losses. 11

12 Chapter 3: Penny Stocks Defined 12

13 What in the world are penny stocks? Penny stocks, or micro-cap stocks, are shares of stock that trade for a much lower price than regular shares of stocks from companies that are included in the larger indices such as DOW and NASDAQ. All of the companies that you see in the larger indices have much higher capitalizations than the companies listed as penny stocks. Market capitalization is actually one of the major references of indices when it comes to segmenting the stock market. The SEC recognizes three major groups of companies based on the size of their capitalization: - Large capitalization ( large cap ) companies are valued at $10 billion or more - Medium capitalization ( medium cap ) companies have a valuation of at least $2 billion - Small capitalization ( small cap or penny stock) companies have a market capitalization lower than $2 billion In terms of risk assessment, small cap companies are considered riskier because they are not part of the larger and more stable indices such as NASDAQ. The risk is inherent in these shares of stock because of the nature of the market and the size of the capitalization of these smaller corporations. I m not going to lie to you: it s risky to trade penny stocks. However, the big difference is that you re not going to be investing $500 or $200 or even $100 on micro-cap stocks. 13

14 Micro cap stocks are actually valued from $1 to $5. The SEC formally states that a company is a micro-cap if shares of stocks are valued at $5 or less. In some indices, a company isn t formally a micro-cap unless the price of the shares of the stock has reached the $1 point. How can you trade penny stocks? Penny stocks, pink slip stocks, or OTCBB stocks are traded through the electronic trading system that was designed and is presently being maintained by the NASD. Again, the big difference between penny stocks and large-cap companies in the Dow Jones Index and NASDAQ is their risk category. They are seen as riskier investments because they tend to be less liquid (i.e. they may be harder to sell off when prices plummet) and there are instances when the companies who offered the stocks never progress to being part of the larger and more stable indices. For example, if a company was never able to gear up and increase its total capitalization, it will remain a micro-cap company and it may disappear after a time because it has failed to be competitive. Note that such risks are inherent in the stock market and in my opinion; micro-cap stocks are unfairly scrutinized just because they don t belong to the larger indices. The essential investment risks present in pink sheet stocks are also present in the larger indices and you can actually lose more money if you start with larger indices because the cost of the shares of stock are much higher. 14

15 If you are strategic with your investments, you can succeed with pink sheet stocks and higher-valued stocks from the big lists. However, if your initial starting capital is small then it makes sense to study the market by investing carefully in OTCBB stocks as these stocks generally have lower values and even if they are riskier, the total sum of money involved would be much lower. Where can you find penny stocks? You won t be able to find many penny stocks on the New York Stock Exchange because this network tends to delist shares of stocks that do not meet capitalization requirements. As I ve mentioned earlier, penny stocks are reflective of the state of affairs of the companies who are offering them. When a company is relatively small and is just getting off the ground, market capitalization will likely be very low (below $2 billion) or just over $2 billion. The trading of penny stocks is usually accomplished through distinct dealer networks or OTC (over the counter) markets. Private stock dealers that communicate with each other electronically dominate these markets. These dealers and brokers are the lifeblood of the OTC market without them, the whole market would not be possible. How safe is the OTCBB market? The OTCBB market, because it s not as structured and regulated as the New York Stock Exchange, experienced a lapse period that lasted for about two years. 15

16 During this time (between ), there was very little activity in this trading area and the total trading value of all penny stocks in this two-year lapse period was less than sixty million dollars. The magnificent drop in the penny stock market was actually caused by severe drops in the larger stock market, where DOW dropped an unprecedented 300 points. It was the bleakest two years for the penny stock market but things actually turned around after that. Before the two-year lapse period of the OTCBB market, admittedly, the market was infested with shady characters who offered bad financial advice and actually targeted first-timers who knew very little of the stock market and pink sheet stocks in general. The thing about pink sheet stocks is even if they did cost very little in comparison to large-cap company stocks, you can still lose money if you re not careful. When the penny stock crisis hit in 2000, all the shady characters that used to dominate the online communications network of dealers, brokers and agents eventually just disappeared. That s right they blipped out and went extinct, because the money was being siphoned to the larger indices. Investors were getting tired of the volatility of the OTCBB market and the nature of the dealer networks were just too unstable to be of any comfort. What s amazing is that this crisis actually did the OTCBB market a world of good! With the old shady dealers and financial advisors gone, the OTCBB market in the United States was effectively rebooted and cleansed. Today, the OTCBB market is now more robust and safer for investors of all experience levels. 16

17 The OTCBB market is actually a community of dealers, brokers and investors it took a bit of time before the recovery was made, but the pink sheet market is presently back in action! 17

18 Chapter 4: Trading Penny Stocks for the First Time 18

19 Are you ready to start trading penny stocks? In the previous chapters we explored the essentials of the stock market and how the penny stock or OTCBB market fits into the equation. You ve seen how the pink sheet market works and what it entails. There are risks to consider and as an independent investor it s up to you to weigh the benefits and the advantages of penny stocks. Penny stocks are less liquid at times due to the shortage in other investors who would like to buy the shares. However in some cases, the penny stock market is a high paced environment where fortunes can be made continuously if you are capable of moving quickly enough. Like the stock exchange the OTCBB market is governed by the natural economic movements of the times such as domestic growth, international growth, etc. It is not a separate entity or market it is part of the economy and it grows and declines just like the larger stock exchange. The sole difference is that the capitalization involved in the companies that are offering the stocks are much lower than what are made available in the large-cap and medium-cap indices. If you think you re ready to start trading, here are some expert sets of guidelines and tips that will help you make good investment decisions along the way: 1. Watch the Dollar Volume The dollar volume in the OTCBB market reflects how much actual money penny stock investors are investing at any given time. It s important to start training yourself to watch out for minute changes and trends as these minor upward or downward 19

20 fluctuations can tell you a great deal as to what s happening in this market. When the total dollar volume of the penny stock index you are watching is increasing, that means that there s more money coming into the companies that comprise the index. This means that there might be upward movement or capital gains to be made in the coming days or weeks, depending on how the capital injection will affect the market in general. So before you get excited, note that an increase in dollar volume is like someone priming the pump for the whole market. Any capital gains to be made should still be monitored closely as there is no assurance that the dollar volume index will affect the majority of OTCBB stocks. 2. Use the Large Indices as OTCBB Predictors The Dow Jones Industrial Average and NASDAQ are all reflective of the gains and losses of large-cap companies and the penny stock market. To recap: large-cap companies are those with a total market capitalization of ten billion dollars or more. These are the big boys of the stock exchange and they re the reason why companies with much smaller capitalizations are often delisted and relegated to OTCBB or pink sheet markets. Now, you may be wondering: if pink sheet stocks are being excluded on a daily basis from NASDAQ, why is still relevant to OTCBB trading? The reason is quite simple: the highs and lows of the major stock exchange also have a huge impact on the smaller markets, such as the pink sheet market. Investors who seem to be focusing on NASDAQ 20

21 often have higher-risk investments and trades, which include pink sheet stocks. When the larger indices are on a downswing, you can be sure that in a short span of time, this downward movement would also be mimicked by the smaller indices. So by monitoring NASDAQ and DOW, you are effectively monitoring the larger market that has a direct impact on penny stocks. Day traders and institutional investors will liquidate high-risk assets in the event of a large downswing. When things get awry, would you hold on to risky stocks? No you liquidate them as soon as possible to protect the integrity of your investment and your entire portfolio. The health of your stock portfolio depends greatly on how observant you are of the downward and upward trends. This is the main reason why when there s plenty of movement in the big lists, there s bound to be repercussions in the penny stock market. 3. Play Close Attention to Potential Slumbering Giants There was a time when Sony and Nintendo fit the profile of a penny stock company because not every company starts off with a five billion dollar market capitalization. Remember Steve Jobs and the Pirates of Silicone Valley? Steve Jobs first exhibited his genius while working in his parents garage. Not very dainty or classy, but look at Apple now it is absolutely wrecking it with its multi-billion dollar empire. Many people are saying that Apple is one giant that is going to be tough to topple in the coming years because it appears to have gotten all the secret equations down pat But then again, it was first located in a garage in a quiet suburb before it grew to its phenomenal size now. 21

22 My point is that in every era, there are slumbering giants. This is what makes penny stocks exciting. Some slumbering giants can rise quickly in a matter of months or even in a year. There are some giants that remain dormant for a much longer period of time but the capitalization of these companies keep increasing while the basic stock price remains low (like $2.50). Locating these slumbering giants is a necessity if you want stability in the OTCBB market. There are many would-be giants in the mix and some of them dissolve due to lack of profit and stability. But when you do find the giants that are bound to reach the large lists in a few years, you ve got yourself a winner. Hold on to these stocks as long as you can and trade them as actively as possible to reap the rewards. 4. Choose Companies That Are Following the Rules As of this writing, the SEC has finally cracked down on shady companies that do not report their earnings properly to investors. These are the scourges of the pink sheet market because it makes the market problematic even if the problem could be eliminated completely. Before investing in a small-cap company check to see if it is complying with present SEC regulations. Small-cap companies are now being required to make short position reports and these reports are available by the NASD. If a company that you think is a good pick has almost no available financial information and its reports are incomplete, it s probably a bad choice. You re going to have a hard time liquidating your shares of stock if you end up with a shady company. Again, pink sheet stocks can be risky due to lack of extra-stringent regulation but it is a viable mode of growing your money from literally pennies. 22

23 5. Ride the Wave of Transitioning Companies When market capitalization of a company increases and the $2 billion mark is breached significantly, a company transitions to the larger index of medium-cap and large-cap companies. What s interesting is that when a company makes a transition to a larger index, there are usually two periods where you can make a lot of profit. The first period is one to two months before the actual transition is made. The increase in stock price is due to the excitement that, finally, a penny stock company was able to breach the small-cap requirement and has transformed itself to a much bigger company with a stouter capitalization. Now here s the catch: immediately after the hubbub, the price of stocks will fall sharply. Sometimes the price drop will be so severe that penny stock warriors are left scratching their heads in dismay. This is normal it s part of the natural ebb and flow associated with transitioning to a larger list. The next wave will occur in about four to six months. A sudden upswing will occur so much so that you may be able to triple or quadruple you stock s value in for a total of two months. After that, the trends will normalize and stock values will begin to follow the larger index trends. 6. Trade Sub-Penny Stocks With Extreme Caution Sub-penny stocks are shares of stock that fall below your usual $1-$5 range. With that being said, it s quite obvious that sub-penny stocks have a much higher risk associated to them, more so than regular pink sheet stocks. 23

24 If they re risky, then why are people still trading them? The short answer to this question is that people like playing with fire sometimes and if they have a small amount of cash that they won t mind losing, they ll invest it in sub-penny stocks. Note however that even if you do succeed at making capital gains with sub-penny stocks, the gains will not be very large. But to an extent, they do teach you a lot about risk management and making quick decisions based on your present knowledge of market trends. If you like trading with risk because it makes you sharper on the drawing board then by all means, explore sub-penny stocks. How to become a successful stock trader, fast Think about every skill you ve developed in your life. Now think about HOW you learned those skills. In almost every case, you would have been face-to-face with other experts. From school, to university, and even learning to drive, the only way to truly learn something fast and effectively is to be in the presence of other experts who can guide you, all the way to success. And with trading, it s no different. Imagine being able to watch over expert s shoulders, as they successfully trade, day after day, right before your eyes? Imagine being able to ask questions, meet new friends, and be surrounded by people you can learn from, to rapidly increase your trading knowledge, skill and experience, and reduce your risk, and increase your returns? 24

25 Well, now you can, with: This is an online community of real stock trading experts, all helping each other to pull off successful trades, and guiding beginner traders to success. It s one of the longest running trading rooms of its kind, showing you where markets are going, where the real opportunities lie, in real time, and how to start trading, today. Unlike free forums, where advice is often deliberately misleading to throw you off the scent, this trading room ( is a dedicated, private community with over 5,000 members, who are specifically there to help each other learn, grow and avoid costly trading mistakes. They focus specifically on binary option trading (in finance, a binary option is a type of option in which the payoff can take only two possible outcomes, either some fixed monetary amount or nothing at all). Now you can master the science and art of profitable trading, shoulder to shoulder with real experts who are willing to guide you to a profitable future. The private room opens Mon-Fri, 9:30 AM to 11:30 AM (EST) and you can claim your virtual seat at: 25