by The Wall Street Daily Research Team

Transcription

1 by The Wall Street Daily Research Team

2 Penny stocks are the black sheep of the investing world. For one thing, they re highly volatile. And some would even say that investing in them practically defines speculation. That s why most investors particularly those with a long horizon avoid penny stocks at all costs. Yet I have a feeling you re not that conservative. In fact, I know you have the right mindset for this endeavor. Still, you might wonder why blue-blooded Wall Street types won t go anywhere near penny stocks, either. Well, here s the thing: Wall Street s problem with penny stocks is almost entirely logistical Mutual fund managers, for instance, are prohibited from investing in stocks with such tiny prices. Meanwhile, high-flying hedge fund managers are just too rich to deal with penny stocks. They ve got billions in capital to throw around, and they can t buy or sell penny stocks without radically influencing market prices. Finally, sell side analysts shun penny stocks because there s just not enough investment banking business available to make it worth their time. 2

3 And you know what? That s more than okay with me. Because there s a fortune up for grabs if you know where to look! At the same time, though, you don t want to get burned so it s critical that you go about it in the right way. But in case you think I just cherrypicked a winning penny stock example, let me warn you penny stocks can tank just as easily, too. Just because a stock is cheap doesn t mean the only way is up. It could get even cheaper. THE PROOF IS IN THE PROFITS If you re skeptical about investing in penny stocks, consider Pfizer (PFE): now one of the biggest pharmaceutical companies in the world Back in 1992, it was a tiny little company trading for just $4.38 a share. It had little to no analyst coverage, but practically limitless potential under its new Chairman and CEO, William C. Steere, Jr. Wall Street was ignoring the stock, and institutions were barred from investing in a company with such a low share price But individual investors like you were extremely well rewarded for their participation when the stock grew almost 1,000% in only six years once the company announced its deal to market the then new drug, Lipitor. But don t think that just because a stock is cheap means you should buy as much as you can Penny stocks can go down just as easily as they can skyrocket up. And that s exactly why I recommend that you adhere to the following five rules when investing in this speculative and volatile corner of the 3

4 market FIVE RULES FOR TRADING PENNY STOCKS RULE #1: Focus on Fundamentals: A cheap stock price is no reason to abandon sound financial analysis. In fact, it s even more important that you conduct proper due diligence. Be picky when investing in penny stocks. Insist on buying companies with solid and improving fundamentals. That means looking for strong sales, profits, cash flow, margins and return on equity, with manageable debt. RULE #2: Limit Your Investments to $1,000 or Less: By making small bets on penny stocks, you can limit your downside risk and rest easier, knowing that a total loss won t torpedo your entire portfolio. If you want to wager slightly more, that s up to you. But don t wager too much, or else you ll undermine any efforts to reduce your risk. RULE #3: Cut Your Losers Quickly: When it comes to penny stocks, buy and hope is not an investment strategy. We re after fast gains. So don t expect to hold any penny stocks for more than three to six months, unless prices are heading steadily higher. Either these companies pay off quickly, or they don t. If it s the latter, sell and move on to a better opportunity. RULE #4: Use Limit Orders: Most penny stocks sport lower-than-average trading volumes. If we use market orders, we ll ending paying more, which ultimately cuts into our profit potential. Instead, use limit orders to buy penny stocks. And be patient. Penny stocks are notoriously volatile, which means you should never have to chase prices. Eventually a dip in prices will materialize. RULE #5: Buy the Best of the Bunch: There are many, many penny stocks to choose from, but most of them aren t worth buying. In this sense, trading penny stocks is a lot like poker you need to choose your starting hands (or pick your stocks) carefully, as most of them aren t playable. When deciding where to invest, look for the following: solid earnings growth, extensive insider buying, unusually high trading volume, and stocks making new 52-week highs. These indicators 4

5 will lead you to winners more often than not. Good investing, The Wall Street Daily Research Team 5

6 In a world of liars, the TRUTH starts here. Nothing published by Wall Street Daily should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Wall Street Daily should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company Wall Street Daily, LLC. All rights reserved. 105 West Monument Street, Baltimore, MD // T. T or or F