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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. If you try
catching a falling knife, you will get hurt.
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 stock
Second, lets look at some tips to help the penny stock trader avoid making
costly mistakes.
Due Diligence
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 corelation 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 IR 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 away.
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 dont 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.
Volume
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.
Size matters
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.
Note: The Leading Source provides its subscribers with both paid and
unpaid profiles. Follow those tips and you will watch your pennies grow
into dollars.
By:
Christopher
Smith
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