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Penny Stock Investing
Written by: Peter Leeds
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.
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. |
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