Entries in Category 'Analysis'

Are Free Penny Stock Newsletters Scams?

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If you’re even remotely interested in trading penny stocks chances are you’ve come across and perhaps even been tempted by all those free penny stock newsletter and alert services scattered across the Internet. Heck even I have subscribed to a few in the past, mostly out of curiosity – I mean they just sound so appealing; the ability to receive endless free penny stock alerts without having to perform your own research which, lets face it, can be a huge undertaking. But the reality is these free stock alerts are not what they appear to be. I’m not going to go as far as calling them scams but they are definitely not objectively chosen stock picks. How can I say this for sure? Read on.

Why Are They Free?
It’s simple logic really. Ask yourself this – Why would a penny stock guru go through all the trouble of finding and performing analysis on penny stocks with high growth potential only to give them out freely to anyone who subscribes to their newsletter? Simple – they wouldn’t, unless of course they had something to gain from doing so. Now I’m not talking about a penny stock advisor offering a few free stock picks as part of a free trial to their service; that is legitimate and something completely different. But aside from a free trial there really is only one reason a so-called “penny stock expert” would give out a steady stream of free stock picks indefinitely – He’s actually a penny stock promoter!

The Penny Stock Promoter
So what is a penny stock promoter? A penny stock promoter, or often called “penny stock pumper”, is essentially someone who heavily promotes a penny stock because he is either financially compensated for doing so (normally by the company issuing the shares) or he himself has already invested in the stock and wants it to artificially rise in price. Once the pumping has taken effect and the stock starts to climb, the pumper will eventually dump their shares making a handsome profit at your expense! Now you may ask yourself, but hey the stock climbed so won’t I make a profit as well if I sell? Possibly yes but more often than not these pumped up stocks will fall very quickly as the pumpers dump their shares, leaving you very little chance of selling in time. Actually this type of scheme has a name: “the pump and dump”. Some of these pump and dumps are so elaborately planned often by several different stock promoters that the stock will climb and climb for days, even weeks before falling.

How to Spot a Penny Stock Promoter
So you might be asking yourself how you can identify a penny stock promoter versus a legitimate penny stock advisor. Well, aside from the fact that a true penny stocks advisor would never freely give out his picks indefinitely, you can also fairly easily spot a penny stock pumper by reading the fine print! Seriously, if you look at any of these sites or the e-mails they send out, they must legally have a disclaimer stating that they were either compensated for their “stock picks” or that their picks should be considered advertisements and not actual stock picks!

What About One Time Fee Newsletters?
Aside form the “free” newsletters, you may also come across one time fee newsletters. Basically they offer you a lifetime of stock picks for just one initial fee. That may sound good to you and perhaps more believable but these “newsletters” are actually even more of sham than the free ones. Not only are they just giving you pumped stock picks, they actually got you to pay from them! Imagine paying money for someone to advertise to you instead of providing actual well-researched stock picks?!

My Recommended Penny Stock Newsletters  (Hint: they’re not free!)
So after all this you’re probably wondering whether there are legitimate newsletters out there that actually provide real and profitable stock picks? The answer is yes and guess what? All of them are not free! Instead, they are typically based on a paid monthly subscription. Now you may not like the idea of having to pay each month for a service but when you think about it, in this situation it makes perfect sense – If a professional trader runs a penny stocks newsletter and their subscribers are consistently making good money from the stock picks, chances are the subscribers are going to stay subscribed, I mean wouldn’t you? So it’s only in the newsletter’s best interest to provide top quality stocks picks that yield consistent profits, otherwise they’ll lose all their subscribers in no time (along with their reputation). That my friends is why a subscription based penny stock newsletter makes sense – it’s one of those rare win win situations.

So, without further ado, here are my two best penny stock alert newsletter recommendations:

#1. Microcap Millionaires ($97 per month) – Recommended for Beginner and Advanced Traders.
Micocap Millionaires is probably my favorite penny stock newsletter and alert service out there. It’s run by Matt Moris, a real down-to-earth guy who cuts the crap and simply gives out straight honest penny stock picks, the majority of which turn out to be profitable, some very profitable (100% and 200% gains are not uncommon). He provides 4 main types of stock picks (sub-penny stock alerts, bottom bouncer alerts, penny pump finder alerts, and reverse merger stock picks) all of which are long picks, meaning he selects stocks that have strong potential to go up in price. Since all his picks are long there aren’t any advanced trading techniques involved which makes this newsletter ideal for anyone interested in penny stock trading including new traders. In the alerts he sends out via e-mail and twitter, he includes the entry price (the price to buy at) and target price (the price to sell at). Now here’s some advice – follow these entry and target prices with discipline and don’t waver from them! Following them will make you some nice gains but ignoring his advice and getting greedy with a trade will more often than not leave you burned. Remember, you’re “trading penny stocks” not investing in them so stick to his picks and you’ll get the results.  Click here for Microcap Millionaires.

#2. Timothy Sykes Penny Stocking Silver ($99.95 per month) – Recommended for Advanced Traders.
Timothy Sykes is another guru I like. This is the guy who turned $12,415 in Bar Mitzvah gift money into $1.65 million all while attending college and has been featured in just about every major business and financial media outlet including ABC, CNBC, CNN, and the The New York Times. Tim’s primary strategy is to use these pump and dump schemes I was speaking of earlier to his (and his subscribers) own advantage. Essentially he seeks out these pumped up or soon-to-be pumped up stocks and either buys and holds them, temporarily riding the artificial rise, or shorts them on the fall and then covers his position for some very large gains. For those unfamiliar with shorting a stock, it’s basically selling stock that you don’t own and then buying them back at ideally a lower price. This is achieved by your broker “lending” you the stock during that period of time. Now short selling penny stocks can be a highly profitable yet very risky game to play as your potential for losses is technically unlimited. You are also often not able to easily short most penny stocks unless your online broker allows it. Still for more advanced traders, following Timothy’s techniques can make you some serious returns.  Click here for Timothy Sykes Penny Stocking Silver newsletter.

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One Example of a Good Penny Stock to Watch – GWG

If you’re like most penny stock traders or investors, you’re more than likely always on the lookout for good penny stocks to watch and potentially buy should the stock reach your target entry price. Penny stock opportunities come and go each day however, so instead of just providing you a list of penny stocks to look out for tomorrow (which will be pretty much useless to you the day after), I want to help educate you in the types of attributes to look for in a penny stock so that you are able to form your own penny stock list at any time.

The example I’ll be using to illustrate my points at the present time is Great Western Minerals Group (GWG.V). Disclaimer – I own shares of GWG and will be merely using this stock as an example. What is right for me may not be right for you so always consult with a licensed financial advisor before making any investment decision. Now let’s get started.

Favored Sector

The first area I’d like to touch on is whether the stock falls under a sector that is currently favored in the market. There is some truth to the saying “a rising tide lifts all boats”, meaning, if the particular sector you invest in is favored in the market, in general the stocks falling under this sector will do well. So, if you’re trying to decide between two great penny stocks and one is in a hot sector, why not choose the one in the favored sector? – It can only help the stock’s potential. In our example, Great Western Minerals is in the rare earth minerals exploration and mining sector which is presently quite bullish.

Potential for Massive Gains

In addition to being in a bullish sector, the stock should have a very promising outlook in both the short and long term. In our example, Great Western Minerals, if we look at the current situation, China mines over 95% of the world’s rare earth minerals. These minerals are essential to manufacture a large number of products including computers, wind turbines, automobiles, and mobile phones. China has been using their near monopoly of these minerals for political gain, even going so far as to blocking shipments to Japan, Europe and even the United States. One can only imagine what would happen if China stopped shipments altogether to these countries. As such there is a massive push to source these minerals from other parts of the world and promising companies like Great Western, are doing just that. In this type of environment, such a penny stock has the potential for truly massive gains which is the type of penny stock you want to look for. Penny stocks are inherently risky so why not choose one that has a large amount of potential.

Healthy Balance Sheet

Regardless of how great the story is behind a stock, what’s equally important is how the balance sheet looks and particular how much debt a company has taken on. Companies with large amounts of debt and little to no income are high risk so it’s always better to choose a stock that is well financed with large amounts of capital and limited debt. Even better is to find one that is also yielding a profit, though good penny stocks like these are hard to come by especially in sectors like mineral exploration.

Bullish Chart Pattern

Since I’m more of a technical trader, I’d say this is probably the most important point to consider. The first three points I mentioned should help you find some great penny stocks to watch but the chart is what will tell you when to actually buy them.

When evaluating a stock’s chart I like to look at both the short term (past 6 months) and long term (past 3+ years) though I find the longer term chart paints a clearer picture of where the stock is headed. Let’s look at Great West’s long term chart as an example.

As you can see from the chart, there are key characteristics that make this stock attractive. Firstly, in general there has been higher volume as the stock price rises compared to when it falls. This indicates confident buying – a bullish sign. Secondly, the stock was in a bearish downward channel but has since broken free to the upside and now resides in a bullish rising trend channel. Thirdly, the stock’s 50-week moving average has crossed the 200-week moving average, otherwise known as a bullish crossover. I’ve found this crossover pattern in particular to be a very positive sign to a stock’s long term outlook.

So this stock is definitely one to watch but is it one to buy now? Perhaps, however I personally might wait first for the MACD to clearly trend upwards again since it’s currently threatening to crossover to the downside which would be bearish.

Of course, I’ve only really touched on a few aspects of technical analysis. To be able to perform adequate TA you really should consider taking a technical analysis course or at the very least, read a good book on the topic – It truly can make or break you as a penny stock investor.  As always however, consult with a licensed financial advisor before making any investment decisions.

What is Penny Stock Investing vs. Trading?

I’ve often found that many investors speak of penny stock investing as if it were the same as penny stock trading. This is actually a common misconception, not just with penny stocks but with all other types of stocks. Trading and investing are two completely different methodologies for building wealth, each with their own advantages. Thus, it’s important to understand the difference between the two and then decide whether you are penny stock investor or trader.

Penny Stock Trading

Trading penny stocks is probably the most popular of the two models, not because it’s any more profitable long term but because you can make a lot of money in a short period of time. The problem is of course that it’s a two-edged sword in that you can equally lose a lot of money very quickly. Penny stock trading methodologies include intra-day trading, swing trading, momentum trading, technical trading, even fundamental trading. Each of these techniques have their own pros and cons but the point is that they are all executed either within the same day (i.e. day trading) or over the course of a few days or weeks. Trading penny stocks is not for the weak of heart – you have to continually monitor your trades via level 2 quotes and be prepared to get out at a moments notice.

Penny Stock Investing

Investing in penny stocks is a completely different animal altogether. After searching for some good penny stocks with greater than average growth potential, you buy and hold them for months, even years at time. It may seem risky, even absurd to some traders to hold penny stocks for that long but that is probably because they are traders, not investors. Remember, just because a stock trades on the pink sheets or has very low capitalization, it doesn’t automatically mean it’s junk. There are plenty of penny stock investment opportunities out there with potential for high gains over the long term, you just have to know how to find them.

How to Invest in Penny Stocks

So how do you invest in penny stocks? Firstly, read my post on the finding the best penny stocks to buy in order to better understand what makes a quality penny stock. Secondly, consider consulting a good penny stock broker, penny stock analyst, or even subscribe to a reputable penny stock newsletter. Lastly, only buy companies you can understand. What I mean by this is if you work in the mining sector you probably have a pretty good idea of what to look for in an up-and-coming mining or exploration company but if you’re in the food industry, don’t even pretend to guess which gold penny stocks look promising. Instead, focus on what you know and you’ll already have a built-in advantage.

Consider a Penny Stock Fund

Another good option for those of you who want to invest in penny stocks but have very little expertise in finding good penny stocks to watch, is to consider a good penny stock mutual fund or ETF. An ETF stands for Exchange Traded Fund; they are essentially funds that closely follow a particular index or sector with much lower expense ratios than managed mutual funds. The advantage of investing in something like the Russell Microcap Index ETF (IWC on the NYSE) is that you can add it into your portfolio and leave it for the long term without having to frequently monitor it. This way you get the excellent growth potential from emerging penny stocks without the excessive risk and maintenance.

A Few Helpful Tips For Finding Profitable Penny Stocks

Successful penny stock strategies often focus on technical analysis as a way to buy profitable penny stocks with maximum returns.  However, I believe the fundamentals of a company are equally important in order to help minimize risk and increase the odds of scoring a high yielding penny stock.

Stereotypically speaking, penny stocks are companies just starting up and in need of capital. They are indeed very risky in nature but if the chosen company is successful, they can provide a huge return on investment.  But how do you identify a good company with great potential?  Here are some factors to consider:

Innovative Ideas and Competent Management
Finding companies that will take off is not an exact science. It requires significant research and a little bit of luck. However if you know what to look for, you can dramatically increase your chances of picking the right stocks.

A successful company needs something that sets it apart; a way of delivering a known product more effectively, a new product, or even a whole new concept. It is up to you to scout out the companies and judge for yourself if their ideas hold water.

Secondly, a company starting up needs competent management. A company with a great idea can easily fail if thoroughly mismanaged. Judging whether the people behind a company are talented can be extremely difficult but look at what experience they have, if they seem trustworthy, and whether they are passionate about what they are doing.  Also, see whether they actually hold stock (insider buying).  If they hold stocks, chances are they truly believe in the company and its future.

Healthy Balance Sheet
Probably the most important factor to consider when making profitable penny stock picks is does the company have a healthy balance sheet?  Do they have significant debt and are they turning a profit?  What is their cash burn and how much cash do they have on-hand?   These are the types of questions you need to answer before even considering to buy penny stocks of a particular company.

Diversify Your Portfolio
No matter how well you pick your penny stocks, you will still be making very risky investments. To reduce the risk you need to diversify. Ideally, you want to invest in other, more secure assets, such as bonds, ETFs, or stocks of established companies like blue chip stocks.  If you only invest in penny stocks (not advisable), you especially need to pick multiple companies. Remember, you want to buy profitable penny stocks, as in more than one; never put all your eggs in one basket.

It shouldn’t come as a surprise that penny stock investing is not for the faint of heart.   However, implementing some of the core concepts discussed will increase your chances of a profitable outcome.

Common Attributes of the Best Penny Stocks To Buy In Any Given Market

Finding good penny stocks is not easy to say the least.  In fact there is no sure fire way to pick the right stocks at the right time all the time.  If there were, we’d all be rich! 🙂  The truth is choosing the top penny stocks to buy is more of a best guess rather than a solid formula.

Having said that however, don’t let this deter you as there are a number of indicators you can factor in when looking for hot penny stocks which can significantly increase your rate of picking profitable penny stocks versus losing ones.  You should never just use one indicator when picking stocks however.  All indicators should be looked at together as a whole to more accurately analyze a penny stock’s potential.  The following are some indicators to consider when penny stock investing:

Strong Price Movement – If a stock has large percentage price gains with heavy transactional volume over the course of a number of days, this could be an indicator that the stock is starting to trend up and build momentum.

ROE (Return On Equity) – ROE, often considered the most important ratio in stock analysis is essentially the quantity of net income returned as a percentage of shareholders equity (SE).  It’s calculated by dividing the net income by shareholders equity. Penny stocks with a positive ROE no matter how small indicates the company has value and is turning a profit.   In other words it’s a sign of quality.

Technical Analysis Indicators – Technical Analysis is a way to predict a stock’s future performance based on past performance.  One of the most important indicators is the MACD (Moving Average Convergence / Divergence) ratio.  The MACD ratio measures whether a stock is trending up or down.  The idea is that if a stock is trending up it has a tendency to continue that trend until of course the trend starts to change (which the MACD can also indicate).  The most common parameters used in the MACD ratio are (12,26,9).  Another popular indicator are moving averages, particularly the 50 day and 200 day moving averages. It is believed that if the stock is above the 50 day, it’s a positive sign and if the 50 day is above the 200 day, even more so.

Sound Business Model – There’s all sorts of companies out there and most of them love tooting their own horn, often sending out press release after press release in an attempt to get attention from both the traders and investors.  Now some of these stocks may sound very tempting to buy but if the business model behind the company doesn’t make sense to you, don’t buy their stock. Simple as that.  There are so many good micro-cap stocks out there with huge potential so why trade something you either don’t understand or don’t believe in?

Insider Buying – When company insiders are buying their own company’s stock, it’s a very positive indicator.  The reason is quite simple.  They believe in their company and the future growth of the stock; why else would they be buying?  And who knows the true financial condition of a company better than those running it?  Enough said.

Actively Promoted – This is one is especially significant to day traders and short term traders.  Essentially, if a stock with a small float (i.e. very few outstanding shares) is being actively promoted by various IR companies, penny stock newsletters, paid pumpers and the like, the stock is very likely to appreciate in value, at least during the promotion.  A typical promotion can last a day, a few days, or even several months.  Like the other indicators, this one shouldn’t be used in isolation when finding good penny stocks to trade and timing a stock promotion can be very risky.  That being said, this one factor should not be underestimated as it can have a huge impact on a microcap.

These indicators will go a long way in helping you find the very best penny stocks with the highest growth potential.  Here’s to your financial success.