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Contrarian Strategies: Selecting Small Capitalization Stocks
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Stocks
Stock represents a share of ownership in a corporation. A bond is a security that represents a debt owed by the corporation to the bondholder, but does not include the ownership privileges of a stockholder. Stocks and bonds are the staples of many...
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Penny Stocks - Turn Your Pennies Into Dollars
We've all heard about the investor how bragged about his 100% or 1000% return on
a stock or about the guy who made it rich by investing in small caps,
undiscovered stocks that made it big. In theory, it seems to be too easy. 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.
About the Author
investment strategies for trading penny stocks.
1source4stocks.com provides traders with online trading and investment startegies and tips. Free stock picks for subscribers to the Leading Source
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