The Beginner s Guide to Investing in Penny Stocks. THE BEGINNER S GUIDE to Investing in Penny Stocks

Transcription

1 The Beginner s Guide to Investing in Penny Stocks THE BEGINNER S GUIDE to Investing in Penny Stocks

2 TABLE OF CONTENTS Introduction...3 Chapter 1: What Are Penny Stocks?...4 Chapter 2: Upsides and Downsides of Penny Stocks...7 Chapter 3: Tips for Trading Penny Stocks...10 Conclusion...12 About Pennystocks.com...13

3 introduction For anyone hoping to get involved with the stock market, there s one big question that must be answered at the outset: Where to begin? The world of stock trading can seem enormously large and complex, forbiddingly so. It s also often impenetrably mysterious to outsiders, a strange paradox given that the media brings us countless stories about the market and its various ups and downs. Penny stocks are a perennially popular choice among novice investors seeking to ease into the stock trading game at the shallow end of the pool, so to speak. This is an attractive option for those who want to buy stocks without spending a huge amount of money. Yet penny stocks can be very dangerous, especially for the inexperienced investor without a good game plan, you will probably lose money. With that in mind, here s an overview of penny stocks and the basic strategies for succeeding with them.

4 chapter 1 What Are Penny Stocks?

5 The Beginner s Guide to Investing in Penny Stocks In essence, a penny stock is an extremely inexpensive one. It s important to point out that penny stocks don t necessarily cost only one cent (though a few do). According to the Securities & Exchange Commission (SEC), any stock priced at no more than $5 falls into this category; in practice, penny stocks are commonly traded for several dollars, fractions of a penny, or somewhere in between. They re also known as micro-cap stocks. Like all stocks, these represent shares of a public company. Finding Penny Stocks If you re searching for penny stocks, you have several options, but before we go into that you must first become familiar with some terminology associated with these securities. There are basically two categories of stock: those listed on formal exchanges like the New York Stock Exchange or NASDAQ, and those that aren t. Ones in the latter category are known as overthe-counter stocks, and they re generally traded through dealer-to-dealer transactions. The placement of stocks in one or the other category is far from arbitrary. It all has to do with the ability and willingness of a company to comply with the reporting requirements of the formal exchanges. For a company to become listed on the NYSE and other exchanges, it must be able to fulfill the rather stringent reporting demands of the SEC. Small companies the kind that tends to issue penny stocks generally have difficulty adhering these filing requirements. Therefore, penny stocks are usually, although not always, considered overthe-counter stocks. So why is this relevant to your search for penny stocks? For one thing, the relatively undemanding filing requirements for penny stocks can make them very problematic for traders; we ll explore that issue in more detail later on. Another consideration is that you won t be able to depend on the NYSE or AMEX to list the penny stocks you seek. Instead, you will find them on the OTC Bulletin Board (OTCBB), which lists stocks that aren t available through one of the major exchanges. OTCBB stocks are subject to SEC filing rules, but these requirements are far less rigorous than those that apply to NYSE stocks, for example. Pennystocks.com 5

6 The Beginner s Guide to Investing in Penny Stocks Another option is to explore the world of the pink sheets. These are publications that are updated on a daily basis with current quotations of over-the-counter stocks. Companies listed on the pink sheets do not have to comply with any reporting requirements; it s basically the Old West for investors a wide open space where seemingly anything goes and the normal rules don t apply. It can be difficult to obtain relevant information about the stocks found here. Purchasing Penny Stocks Your stockbroker can handle orders for penny stocks in much the same way they manage any other type of stock. Pennystocks.com 6

7 chapter 2 Upsides and Downsides of Penny Stocks

8 The Beginner s Guide to Investing in Penny Stocks Penny stocks can be profitable, but it s important to know what you re getting yourself into. This certainly isn t an easy way to make money, and a large number of inexperienced investors have ended up in over their heads. There are benefits to this kind of stock, but there are dangerous pitfalls as well. Let s explore the good and the bad of penny stocks. The Good Low barriers to entry Many beginning stock investors simply don t have a lot of funds to dip into, or they simply don t want to risk too much money while they re still in the learning stage of their investing career. That s a problem for people who would prefer to purchase those attractive, high-profile stocks listed on the NYSE and NASDAQ, which tend to trade for substantial sums of money. Penny stocks provide a way to get around this difficulty. With just a modest financial commitment, tyro investors will soon find themselves buying and selling micro-cap stocks, gaining valuable experience along the way. Relatively low risk Because penny stocks don t cost much, there s no need to bet the farm on them. By low risk, we don t mean that penny stocks are an easy investment they re not, and the inexperienced investor will likely lose money on them. It s just that the sums at stake are fairly small. For instance, it s possible to buy 1000 shares of a stock for only $10 if the stock is priced at $0.01. If you re uncertain about how to play the stock market game, penny stocks provide a way to experiment a little without having to imperil your bank account. High profit potential One big advantage of penny stocks is that even a slight rise in the stock you hold can pay off substantially. We can best explain this phenomenon by looking at a concrete example. If your $50 stock increases by $2 to $52, then you can make only a modest profit. On the other hand, if your $1 penny stock increases by $2 to $3, then you have literally tripled your initial investment (not taking transaction fees into account). Penny stocks tend to be volatile, so this is by no means a very rare occurrence. Pennystocks.com 8

9 The Beginner s Guide to Investing in Penny Stocks The Bad Susceptibility to scams Anyone who plans to purchase penny stocks must be aware of the infamous pump and dump scam. It s a simple market-manipulation trick to which these kinds of stocks are particularly susceptible. It begins when an investor (or group) that owns a large number of shares in a particular company artificially inflates the price through a campaign to convince investors that the stock will soon rise sharply. This campaign can be conducted in a variety of ways through newsletters, blasts, social media, Internet discussion forums, or any other platform that they can find. Typically, the entity disseminating this information will conceal the fact that they stand to gain from any spike in stock price. Once rumors have taken hold, investor frenzy drives the stock price upward. At this point, the entity responsible for pumping up the price will now dump the stock, often making a huge profit in the process. Meanwhile, investors who decided to jump aboard the gravy train based on unfounded rumors find themselves with all-but-worthless stock whose price rapidly crashes once the hype has died down. As penny stocks frequently suffer from poor liquidity (see below for more information on this), they are particularly vulnerable to these unethical attempts at market manipulation. Difficult to find relevant information As previously noted, stocks listed on big exchanges like NASDAQ and AMEX must comply with SEC reporting requirements. This allows investors to take a peek at a particular company s fundamentals that is, their profits, revenues, and other revealing metrics. All of this data is publicly accessible, and prudent investors consult it before deciding whether to purchase stock. It s one of the best tools that investors have at their disposal. But penny stocks usually aren t subject to these requirements, which means that these kinds of companies tend to have an air of secrecy about them. Is the company making a profit? Is the company just a shell for pump and dump scams? Is the company on the way up or ready for a tumble? With penny stocks, it s often very hard to say. In addition, a lot of penny-stock companies haven t been around very long, so there s no option to consult the business track record because there isn t one. Poor liquidity Liquidity refers to the ease by which a given asset can be traded without changing its value. Popular stocks generally have good liquidity you ll usually be able to sell off your stock without causing the price to rise or dip significantly. This doesn t hold true for penny stocks, however: Because there are so few shares potentially available for trade, transactions tend to alter the price, sometimes considerably. Why is this significant? Poor liquidity also means low levels of market activity that is, it can be difficult to find buyers for these stocks. As a result, it s all too easy to find yourself stuck with a lot of penny stocks that no one wants to purchase, and it goes without saying that this is bad news for you as an investor. Now we arrive at the big question: How can you maximize your chances of success with penny stocks? Pennystocks.com 9

10 chapter 3 Tips for Trading Penny Stocks

11 The Beginner s Guide to Investing in Penny Stocks It cannot be emphasized enough that penny stocks do not represent an easy road to wealth. Investors can and often do lose money with these stocks. That said, let s look at some strategies for increasing the likelihood that you will turn a profit. Don t put all your eggs in one basket This is sound advice for many things, but it s especially true for penny stocks. No matter how attractive a given stock may seem, it s just not wise to devote too much of your funds to it. Remember that even experienced investors have gotten caught up in buzz and lost substantial amounts of cash as a result. There are no sure things. So what s a good rule of thumb here? PennyStocks.com advises spending no more than 15% of your investment money in a penny stock. Do research As we have discussed, penny stock companies often operate under a veil of secrecy, if only because they do not need to comply with all the SEC filing requirements of those businesses on the major exchanges. This does not necessarily mean that these companies are frauds, but there is no doubt that a significant number of them are. Some companies are basically shells that provide no services, create no products, and generate no real revenue these are often used for pump and dump scams, and they should be avoided. Try to find any financial statements and any other relevant materials that have been released by the company. Information is key; with a little diligence, it s possible to find an attractive company that has been undervalued by the conventional wisdom. Of course, it s also worth pointing out that the free newsletters available from PennyStocks.com can also aid you in making your investing decisions. Keep your emotions in check There is no doubt that investors, even ones who should know better, tend to allow fear, greed, and irrational optimism to guide their actions. Everyone wants to surf the next big wave that comes through the market, everyone wants to avoid holding the bag after a stock has fallen from favor. Some investors basically fall in love with a stock, or a certain type of company, and they allow their blind enthusiasm to prevent them from making logical decisions. Investing in stocks, even in the micro-cap levels, requires a sound game plan, and the ability to stay with it in the long term. You should be aware of how much money you re willing to spend and what your exit strategy is. Figuring out these things in advance will keep you from succumbing to the temptations of impulse buying and seat-of-the-pants decision-making, which have ruined many investors. Pennystocks.com 11

12 Conclusion Penny stocks are a risky investment due to their volatility and relative absence of available information about the companies that issue these securities. But they have enormous profit potential for investors who manage to pick the right stocks. It s not an easy way to make money, but the good news is that investors can substantially increase their odds of succeeding with penny stocks by educating themselves, researching companies, and adhering to a well-conceived game plan.

13 About PennyStocks.com PennyStocks.com has earned a name as one of the most trusted and dependable research firms in the field of micro-cap and over-the-counter stocks. The site offers a weekly newsletter and a variety of informational articles.