Penny
Stock Investing
By: Peter Leeds
The Nature of Penny
Stocks
For anyone new to investing in penny
stocks, you should first be made aware of the differences between
these micro-cap stocks and the more conventional blue-chip and mid-cap
investments. Unlike buying shares in a large, stable company like Ford or
IBM, you are dealing with speculative investments.
Penny stocks literally trade for
pennies per share, or for as much as a couple of dollars. The beauty of
penny stocks, of course, is that sometimes they ‘grow up’ and become
mid-cap stocks, multiplying in value hundreds of times over and making
many people very wealthy.
With penny stocks, also called
micro-caps or juniors, you will see much greater price volatility, and
thus greater and quicker gains and losses in asset values. It is precisely
this volatility which draws investors to the junior markets, as one good
pick could make you hundreds of times what you could ever make on the
larger markets.
Of course, there is more risk than buying bonds, blue chips or defensive
stocks - but this added risk is tempered with the possibility of making
the big gains.
Most penny
stocks, but not all, are resource or technology companies who
initially sold shares in an effort to raise money for exploration or
product development programs. Many of the companies have large debt loads
and are not necessarily making more money than they are losing.
However, it is the potential of a major, or even minor success in their
quest that often incites dramatic price climbs, and this is where their
value lies.
Day Trading in Penny
Stock Profit Potential
Modern Strategies Inc. owner of
http://www.pennystockinsider.com, has been in the business of
researching penny stocks for many years, and has become effective at
uncovering the best small cap investment opportunities and the most
rewarding profit situations in the penny stock markets.
There are several ways to profit from penny stock investments.
Modern Strategies Inc. has uncovered the most highly rewarding investment
situations.
Promotional Stocks - These issues may or may not have much actual
value. Promoters generate interest in these types of stocks in an attempt
to drive share prices higher. The promoters own great amounts of shares
and so they make more money the higher the share price travels.
Eventually, they sell their holdings into the promotion and generate great
personal profit. Then they move on to the next project, leaving the
original stock and all its investors behind. Without the work of the
promoter, the promotional issue soon comes crashing down.
These are the type of stock investor hear horror stories about, because
many people often lose a good deal of money when they are naive about
promotional ploys. However, getting in on a promotional stock early in its
life cycle, and keeping an eye on the actions of the promoter can be very,
very rewarding. It's like having a full time stock promoter doing
everything in his power to get the share prices of the stocks you own to
go through the roof, and investors who get in early can go along for the
ride!
Technical Precursors - Often technical analysis can reveal patterns
in the trading cycles of penny stocks. Sometimes these patterns illustrate
excellent buying opportunities, where the underlying stock has a high
probability of moving up strongly, and only a low probability of declining
in value.
In addition, there are sometimes
situations where several positive technical indicators combine at once to
reveal that an issue is very likely to increase strongly in price over a
short time frame, indicating that the particular issue is has excellent
investment potential.
Fundamental Strength - Fundamentals involve such criteria as
earnings, debt load, assets, and many others. It was long thought that
earnings were the major driving force behind share prices, but Modern
Strategies Inc. has since disproved this theory as it applies to penny
stock companies. Instead, uncovering the best medium to long term
investment opportunities must be done through exhaustive analysis of
company financial statements. Investors should get involved with the
companies that are making the most money, have the most effective
management, and have improving trends in all factors of their operations.
As well, industry comparisons and the examination of key financial ratios
present clues as to which companies are destined for higher share prices.
Proper fundamental analysis of penny stock companies will generally reveal
that there are about 2 or 3 superior investment opportunities out of every
100 companies examined. These 2 or 3 excellent corporations often
represent better investments than 90% of stocks on the large-cap markets
like the NYSE.
Undervalued Situations - Sometimes companies see their share price slide
dramatically. There are occasions where this decrease in price has very
little to do with the underlying fundamentals, and more to do with factors
such as overall market weakness, interest rate increases, or others.
Opportunity exists in such situations because the shares are often
'unfairly valued' and a return to more realistic prices is inevitable.
There are often cases where companies have more cash on hand per share
than their share price, or have price to earnings ratios as low as 5.0.
Although there is much more to uncovering the best undervalued situations,
this is the basis behind the concept.
Minimized Downside - Often the combination of technical analysis and
undervalued situations can reveal penny stock companies that have
tremendous upside potential, and have a very low probability of declining
in value to any significant degree.
These type of investments are excellent choices for penny stock investors
that are less risk adverse.
Special Notes About Penny Stock Companies
Penny stock companies change their names more commonly than other publicly
traded companies, and are also subject to more stock-swaps and
consolidations. In any of these events, your shares in your account will
be automatically replaced with the appropriate stock by your broker and
notice will be delivered to you.
For example, if you owned 5000 shares of EXO and for every 5 shares you
were to receive 2 shares of LOR, you would find your account holdings
re-adjusted to reflect 2000 LOR which can be traded as normal. You will no
longer have the 5000 EXO.
On rare occasions, a penny stock company can become delisted. This means
that the shares will no longer trade on the exchange, and if the company
does not get listed on another exchange or re-instated at a future date,
you may be subject to a loss of capital equal to 100% of the total
investment. However, this is a very rare occurrence, and there are simple
ways to protect yourself against it which are periodically discussed in
Modern Strategies Inc. publications. Delisting generally becomes a greater
concern for investors who intend to use a long-term (several years) buy
and hold strategy with penny stocks.
About the Author:
Peter Leeds, one of North America's leading Investment Coaches, is a
self-made millionaire who has created his fortunes on the stock markets.
He has also empowered thousands of individuals to do the same. His
personal success and incredible ability to consistently pick money-making
stocks has earned him a loyal following of successful investors and has
generated significant attention from the financial world.
Source: www.isnare.com
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