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How To Invest In Penny Stocks

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Infographic courtesy of Timothy Sykes.

Infographic courtesy of Timothy Sykes.

Successful penny stock traders, such as Tim Grittani, often make headlines. On September 20, 2015, CNN Money did a story on Grittani, a star pupil of Tim Sykes, famed penny stocks day-trader turned penny stocks investing instructor. Over a period of three years, Grittani turned $1500 into an investment portfolio worth more than $1 million. Success of this magnitude is the exception, not the rule, in this market. Volatile, with the potential for high returns or high losses, penny stocks success requires knowledge, skill and, for the average person, moderate expectations.

Penny Stocks Defined

The Security Exchange Commission (SEC) defines a penny stock as a common company share priced below $5. In common usage, however, the term is used to describe shares with a trading price of less than a dollar or two. These shares are not typically found on national exchanges, though some notable exceptions could be pointed out, such as when Ford was trading at a mere $1.87 during the first week of March in 2009.

Penny stocks, also referred to as microcap stocks, are usually traded via the Over The Counter Bulletin Board (OTCBB), an exchange run by the National Association of Securities Dealers (NASD), or in over the counter markets, including the OTCQB and the OTCQX. Information on these stocks, including bid and ask prices, is published daily in what are called pink sheets. The requirements for OTC listing are less stringent than for stocks listed on the New York Stock Exchange or NASDAQ. There is far less SEC involvement in penny stocks than in stocks trading on national exchanges on par with the New York Stock Exchange.

That difference in degree of stringency is an important distinction to bear in mind when assessing the viability of companies offering penny stocks, whether those shares are offered via exchange or market. In general, penny stocks offered via an exchange tend to be a bit – and that can be a very little bit – safer than those offered in over the counter markets. That doesn’t mean that there are not good buys to be found in the OTC markets. What it does mean is that, when dealing in penny stocks, due diligence is always required.

Due Diligence Is A Must

Low share prices alone are not indicative of high risk or volatility. After all, there are many healthy, thriving small businesses. In fact, small businesses collectively employ more people in the United States than large ones do. Share price must be placed in context to arrive at a company or stock assessment that is as accurate as possible. Due diligence is all about assembling the pieces of information necessary to create that context.

Because penny stocks traded in the over the counter markets are obligated to provide less information than stocks traded via exchanges, you’ll have to do some serious research to properly perform your due diligence. You’re going to want to know about the history of the company, as well as its trade history. There’s a big difference between a small company on the way up, one that is gradually growing and a company that is on a downward trajectory, perhaps delisted or fighting to avoid bankruptcy. A suddenly hot stock from a company with no real history or with a history that simply doesn’t logically merit such sudden interest should be viewed with caution.

Beware Of The Classic Pump And Dump

That sudden, almost viral buzz around a little known company can be a sign indicating that a schemer is trying to make a killing using the classic pump and dump ploy. In this scenario, the schemer sets a whole lot of buzz in motion, hyping a particular company and its stock, shares that the schemer bought at a very low price. As interest grows, demand for the stock increases, right along with price and trade action. The higher the rise in share price, the more money the schemer will make when he or she sells that stock. Once the stock is sold and the profit made, the buzz dissipates and disappears, as does share value.

Study Trade Theories

Take the time to develop a real understanding of trade theories. That way, you enter the market with a plan of action. For the beginner, one of the safest strategies is to not hold on to penny stocks for too long. If you see a reasonable gain, or return on investment (ROI), be satisfied with that. Sell the shares and make that moderate ROI, instead of holding it in hopes of the price shooting up, garnering a return of two, five or ten times what you paid for the shares.

Once you gain a bit more experience, learning the signs of a company that is in a growth mode and recognizing the sorts of signals that may indicate a stock price is going to spiral seriously upwards, then you can move beyond the safety zone into those higher risk trades. There is a difference between educated risk and blind risk. Educated risk is part and parcel of successful stock trading, but wait until you have the knowledge and experience to take your trading to the next level.

Practice On Paper

One way to feel out penny stock trade theories and to get some real time trade experience without risking the loss of your hard-earned money is to practice on paper. Use a notebook to open up your practice trade account. Decide how much pretend cash you are going to fund your notebook trading account with. Research real trade rules, fees and limits and abide by them, treating your notebook trading account like it is the real thing while you buy and sell penny stocks according to the various trade theories you are learning.

As you learn trade theories, open a notebook account for each one and compare the results of your trades. Try developing your own method from the various theories, taking what you think works from each of the theories you are testing. Open a notebook trading account based on your assimilation of trade theory information and gut instinct. Once you find that you are consistently making good trades and understanding the how and why of those trades, you are ready to take your newly developed trading skills into the real world penny stock markets.

Setting Up For The Real Deal

The first step is to find a broker willing to work with what your budget allows for your penny stock trading adventure. You can find online brokers associated with well established brokerages with a proven track record of quality customer care willing to open a trading account for as little as $500. Before making a final decision on your broker, compare transaction fees and trade restrictions between at least three different brokerages.

Once you’ve created and funded your trading account, you can automate certain account functions for buying and selling. Not everybody can invest full-time hours into being in front of the computer screen watching trade action and performing manual buying and selling actions as trade ebbs and flows throughout the day. With a limit order, you can set the highest price you are willing to pay for a stock that you’re interested in. When it comes to selling, you can place an order to sell if stock price hits a certain point.

While it certainly is possible to be wildly successful in the penny stock market, building the sort of investment portfolios that Grittani and Sykes have, that sort of success is rare. You may be better off with more moderate goals and expectations, using investment strategies that feature moderation, caution and smart risk-taking. When you profit, take some to add to your capital and leave some in the account to increase your investment fund. And, remember the tortoise – slow and steady often wins the race. You may very well find that over time, using that approach, you exceed your expectations.

Only Invest What You Can Afford To Lose

While experience and knowledge can protect you from many trade errors and losses, it cannot protect you from them all. Even the well-experienced trader can experience huge losses in the penny stocks market. The fact is penny stocks are and will always be a volatile market. Start-ups come and go. A company has a lifespan. Sometimes that lifespan can be generations long, but all too often it isn’t. Sometimes, the market throws a curve ball that is impossible to predict. Your smartest strategy is to invest only the amount of money that you are willing and able to lose.

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Investing Basics and How To's

Inventors Can Predict the Cost and Demand for Their Products by Using This Model

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Although it takes a lot of time and effort, in the beginning, stages to create a product you imagined, the work is often well worth it when it sells well to make up for the expenses used to make it and then some. Financial success for entrepreneurs varies, depending on their marketing skills and how useful their product actually is, but most wonder how retailers actually distribute their products.

It is the same question Kris Ferreira, an assistant professor of business administration asked at a presentation at Future Assembly. Every retailer much faces tricky and tactical choices related to product placement, assortment, pricing, and inventory. Ferreira mentions that every single one of those choices would have been simple to make if retailers were made aware of consumer demands we.

She added that the primary issue for her was that she had a lot of uncertainty when it came to the demand for her product. Nevertheless, it’s a less than complicated riddle that can get solved. Ferreira believes that the trick one should use for tactical design making such as this lies in quantitative analysis. She stated that the business world uses a few interesting analytics for products. One of them is called descriptive analytics. It analyzes what has already happened. Another is called predictive analytics, which analyzes data to figure out what to do next. The third is prescriptive analytics, which uses data to choose what to do next.

These forms of analysis involve events, analytics, and products. Events include the date length, and the type of event. Analyicits consists of discount percentage, cost, relative cost of competing styles, amount of styles bought in the same subclass and event, the number of branded events in the last year, and the number of concurrent events in the department. Products include the class, color popularity, size popularity, type of brand (A or B), the popularity of the brand, and department.

Ferriera believes to be able to combine predictive analytics to predict demand with prescriptive analytics so they make tactical choices, lies in the data. She showed field work that she and her colleagues worked on along with Rue La La, an online retailer located in Boston. The Boston-based company is known to be a flash sales business that offers highly discounted and limited time offers on accessories and designer clothing. Most of the “limited time” offers that they sell in the store include items the retailer never sold at their store, and a couple of them would sell out quickly. In that event, the retailer takes it as a sign that they could have charged more for the product.

On the other side of the fence, there were products that didn’t sell well, which would signify that the products were priced too high. The primary challenge to those conducting the research was figuring out how to predict demand and create prices to maximize the revenue of the new products with no prior sales data. They decided to make a pricing decision tool that had the ability to use current data to maximize revenue on new products. The researchers took advantage of machine learning techniques that could estimate lost sales in the past (the products that sold out), and predict the demand for a new product the company would sell in the future.
While they were working on the research, they discovered that the demand for a certain product also depended on the cost of other products in the same category. From that finding, the researchers made a highly efficient multi-product price optimization algorithm to suggest a cost for all the items listed on Rue La La’s website on a given day. In January of 2015, the researchers worked alongside Rue La La during a field experiment to assist the retailer in creating optimal prices for new products they will add. The researchers were able to show how Rue La La was able to increase their revenue of products in the experiment by nearly 10% via price recommendations from the algorithm. It also had a low impact on gross sales quantity.

Ten percent may not seem like much, but it’s a big difference, especially in preventing experiencing a loss in sales. Even though the research gave its undivided attention to a flash sales setting, they are certain their techniques would also be extremely useful for just about any other retailer. It doesn’t matter if they operate fully online, at physical locations or a blend of the two. It would be beneficial to them anytime they had to create unique costs for new products they would sell before they make them available for consumers.

In a broader aspect, the work the researchers conducted positively illustrated how both prescriptive analytics and predictive analytics can get mixed to create a tactical decision-making tool that can largely impact how well sales can go for a product.

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Investing Basics and How To's

A Trade Is Not Successful Until The Profit Is Booked

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MarketTamer | by Gregg Harris

Posted on April 6th, 2015

Being consistently successful in trading typically requires a lot of work. Sometimes you get lucky, and in extreme bull markets we all look like geniuses. But most of the time it takes a lot of work. While I’ve written a lot of software over the years to generate high probability trade candidates, I still often end up with 5 to 10 good candidates and I have to narrow the list down further. I can spend up to an hour per trade candidate to finally come up with a trade setup I’ll publish in my newsletter.

For example, over the November 22nd, 2014 weekend, after spending about 8 hours looking over my seasonal scans and checking charts and fundamentals, I came up with the stock that had the most going for it – Brinker International (EAT), the owner of restaurant chains like Chili’s Grill & Bar. The stock looked ready to break above early 2014 highs.

Click here to view the chart

What led me to consider Brinker’s stock to begin with was the impressive seasonal pattern. I stated“The seasonal pattern of EAT for this time of year shows a strong track record of gains over the next 4 to 6 months. Notice that over the past 17 years, during the next 22 weeks EAT has had only one losing year.”

Click here to view the chart

So in Monday’s newsletter (11/24/2014), I gave this trade setup:

Click here to view the chart

The stock opened at 54.38 but quickly rose above 55.50, so the trade was triggered.

I covered how the trade initially worked out in the January 5th, 2015 MarketTamer blog posting titled Another Seasonal Trade Comes Through. But up to this point, the trade was successful only on paper. If not managed properly, it could still end up with a loss.

The stock position quickly gained 13% over 3 months. But since then, EAT has settled into a sideways range.

Click here to view the chart

This may only be a consolidation phase. EAT may eventually break out on the upside for further gains. But there were 3 things that bothered me. First was the mere fact the stock had changed character. A brief consolidation would be normal. But this was now going into 3 months.

The next thing that bothered me was news came out that their same-store sales increases were below many competitors. Their polish was starting to wear off.

Finally, Brinker is due to announce earnings on April 21st, before the open. Brinker is one of those stocks that often reacts sharply to earnings announcements.

These may just be minor factors, and with a strong stock they may be meaningless. But with the first quarter earnings seasonal about to start, and rising speculation that there may be many disappointments in the results, I felt it wasn’t worth giving back any profit we had already made. I can always re-enter a position in the stock once the earnings-season smoke clears.

So in last Monday’s newsletter I told readers that I was closing the EAT position at the open. The stock gave us a nice 9.4% return (actually 10.5% return because we received two dividend payments while in the position).

Now I can consider it a successful trade because the profit is booked. But until I closed the trade, I had to continually re-evaluate the trade to see if the original conditions had changed, or if there is an upcoming event that could change the reward-to-risk setup of the trade.

So it’s not just doing the work to get into a trade, it’s doing the work to stay in or exit it with good cause to make sure it gets booked as ‘another success’.

Of course, there’s much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link:www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2015 Stock & Options Training LLC

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Investing Basics and How To's

Bonds at bubble levels: Pro

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Charles Bobrinskoy said why stocks are much more attractive than bonds or cash? Charles Bobrinskoy is the Ariel Investments vice chairman & portfolio manager. Using history as their guide, and weighing current stock valuations and interest rates, different investment pros believe stocks have a much better opportunity than bonds to hit inflation in the long run.

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