Entries in Category 'Basics'

Penny Stocks for Dummies Guide – A Quick Synopsis for the Neophyte Trader

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I thought I’d sum up the basics of penny stocks in one simple post that anyone can read and immediately gain a good foundation of what they are and some of the better ways to find profitable penny stocks to buy.  The fact that you are reading a penny stocks for dummies article makes you not a dummy.  Information is how anyone succeeds, and penny stocks are no different.  It’s a smart thing to have a good understanding of penny stock investing and performing adequate research before even thinking about buying penny stocks.  Bear in mind that each of following categories can certainly (and should) be looked into with much greater detail but this should get you started.

What Are Penny Stocks?
A penny stock has many definitions.  For those who only trade on the large stock exchanges a penny stock is any stock that is less than $5 per share.  The other definitions are generally based on market value.  The market value is the number of shares multiplied by the price per share.  Penny stocks are usually stocks with a market value less than $200 million (this number can vary.)  The most obvious definition is any stock with a price less than $1 per share.  The last definition you may see is any stock that is traded OTC (over the counter) or on the pink sheets.

Regardless of your definition the point of penny stocks is your trading lower valued companies that have less information about them because the company isn’t required to have independently audited records and is never covered by a stock market analyst because virtually no one would read about it or pay for the information.

Penny Stock Risks
Without a doubt, the penny stock carries more risk than the average stock.  The primary reason for this is the low value of the company makes the price easy to manipulate by wealthy individuals or small groups of people.  A 100 billion dollar company can’t easily be manipulated by any individual person.  A $50 million dollar company however can have 20% of the whole company traded by thousands of different individuals or small trading groups.  Surges in buying and selling activity can manipulate the value of the company on the short term causing inexperienced traders and investors to change their buying and selling activities.  This type of activity can be shady at best.  Worse still, other people move beyond shady and into scams.

There are two primary penny stock scams that focus on the inexperienced traders and investors.  For traders the biggest risk is the pump and dump.  Here an advertising campaign will get a certain penny stock very hot by getting people who aren’t even into penny stocks, buying them.  Then this will trigger your trading signals which under natural conditions would make a great trade.  The scammers then dump all of their stock quickly into the buying spree.  Once the marketing campaign is over and the scammers made their money, they are out and the price collapses.

Penny Stock Trading and Investing
In general when penny stock trading you’ll often do better with short term trading rather than holding stocks for years. This is because the longer your trade is the more risk you apply to your trade with scammers coming in or companies having negative information released. When penny stock investing you’ll also do best if your good at getting information no one else has. This is usually done by talking with people who work at these small companies to see how viable the company truly is. Those who are willing to go deeper than the information available on the internet can really win huge with penny stock investing.

Traditional technical analysis (i.e analyzing stock charts) and fundamental analysis (analyzing the financials) can also both help narrow down a profitable penny stock from a dud so don’t underestimate these traditional yet very effective stock screening methods.

Hopefully this provides a good “penny stocks for beginners” overview but don’t stop there; educate yourself further by reading my other posts and consider subscribing to a reputable penny stock newsletter. The more informed you are with proven penny stock strategies and solid investing advice, the better your outcome.

Follow a System that Works
Now if you’re really serious about making money trading penny stocks I highly suggest you subscribe to a reputable newsletter that provides real-time trading alerts and has a proven track record. Trading penny stocks is a high risk, high reward venture so it is absolutely vital to have a seasoned professional guide you.

One such newsletter I can recommend is called Microcap Millionaires run by Matt Morris and the main reason I like his service (aside from the nice gains) is his straight honesty – Unlike other newsletter and alert services out there that are often nothing more than paid penny stock pumpers, Matt is an actual trader who cuts through the bull and gives you his straight unbiased recommended trades.

But before I go any further I must say that though Matt’s real-time alerts can be extremely profitable, if you’re the type of person who has a hard time following instructions and instead lets your emotions drive your trades then please do NOT bother subscribing as you’d only be wasting your time and money. The reason I say this is because for you to really succeed with Matt’s service (or any trading methodology for that matter), you need to be highly disciplined in your trades. For example if you buy a recommended stock and it jumps up to the target price, sell your stock and lock in your profits. Don’t get greedy and hold the stock longer than suggested or you could very easily get burned. Also do not invest too much of your capital in any one stock – yes the majority of his trades are profitable, often very profitable, but you still need to spread the risk evenly so as to protect yourself from the odd potential loss.

Now just to forewarn you, when visiting his site the first thing you’ll probably notice is, well, the intro video is a bit cheesy (sorry Matt 🙂 ). Okay so he may not be the best video producer but he’s damn good at picking penny stocks!  And if you can simply follow his stock alerts with discipline, you’ll likely be shocked by the type of consistent profits you can yield. Click here to learn more about Matt’s Microcap Millionaires newsletter.

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Find a Penny Stock Broker That Suits Your Trading Style

Choosing the best penny stock brokers for your trading style is a very individual decision.  Each broker has a different pricing structure for buying penny stocks or a large block of stocks.  You need to understand how you intend on trading before choosing online penny stock brokers in order to better gauge how much money your orders will cost you.  If you have an eradicate trading style than you may want to open an account with multiple brokers so that you can use the proper broker for the proper trade.  For the new penny stock trader, keeping your commissions under control can be the difference between profitability and bankruptcy.  For the advanced penny stock trader, you already know that one website order drop or delayed order fill can turn the best trade of the year into a missed opportunity or even a nightmare.

Here are a few of the top penny stock brokers and their differences.

Zecco
Zecco is dirt cheap, no doubt about it.  They are currently at $4.50 per trade with no “per share” fees.  The only problem is they don’t emphasize penny stocks in their trading.  Normally, this means they don’t know the penny stock community.  They are really great though if you also do forex and option trading.  If you are a smaller trader this is a great option because the low flat fee makes the commission percent of trade very manageable.

TDAmeritrade
TDAmeritrade is a little more expensive stock broker.  The good part is they have a emphasis on OTCBB or pink sheet trades for the same flat fee of $9.99 per trade.  This company is very established with very powerful charting tools and the ability to trade pre and post trading hours.  This is great for those nano companies that love to give press releases at the closing bell.

ChoiceTrade
ChoiceTrade is another cheap option at a flat $5 per trade fee.  They also offer mobile trading (for you cell phone junkies) and direct access trading.  If you are a scalper or large trader than direct access allows you to bypass the web portal and order batching.  Your order directly hits the market on your own.  The bad part of ChoiceTrade is they charge for almost all of their information services on a monthly basis.  These nickel and diming fees are both annoying and draining when your trading is going poorly.

SogoTrade
SogoTrade is probably my favorite unknown online broker.  They are only $3 per trade!  However, for the true penny stock traders (Under $1 per share) they add ½% of the trade value for each trade.  They have great trade execution (basically a virtual direct connection) and no inactivity, information, charting, or any other hidden fees.

LowTrades
I question LowTrades simply because they won’t post their pink sheet fees.  They have a nice low $4.95 flat fee, but they say there are settlement fees for OTC stock trades, but they are not listed anywhere.  That just screams trouble to me, so I haven’t even bothered to try them.

Scottrade
Scottrade has a $7 fee with a ½% principal fee for stocks under $1 per share.  However, they are a powerhouse in the industry.  They offer quality information and charting systems and how massive trading power since the volume of dollars they move affords them the best stock traders and programmers.

In summary, though there isn’t one best penny stock broker for everyone, if you’re brand new to penny stock trading I recommend you just go the cheapest route which would be Zecco unless you are only doing NASDAQ penny stocks ($5 per share) in which case I would probably choose SogoTrade.  If you are a larger investor I would go with ChoiceTrade for the quality direct access or Scottrade for the professional platforms.

Choosing Where to Buy Penny Stocks Depends on Your Trading Experience

There are essentially three different options when choosing where to buy penny stocks: A discount brokerage firm, a full service brokerage firm, and a money manager or investment advisor.

Discount Brokerage
A lot of people just go with a discount brokerage firm because it’s cheaper.  I believe this is fine for seasoned investors but not if your new to stock trading, especially penny stock trading, due to its highly volatile nature.  There are many good discount brokerage firms and pretty much all of them are accessible online.  A discount brokerage account will allow you to buy and sell stocks online at the click of a button.  They normally will charge you a set commission per transaction though many will lower the commission if you are a high volume trader.  Some good discount brokerage companies include Interactive Brokers , TD Ameritrade, E*Trade, and Charles Schwab.  Just make sure you compare the services offered and their fee schedules as depending on the type and quantity of trades you perform, one firm may be more cost effective than another.

Full Service Brokerage
Despite the growing popularity of discount brokerages, there are still a good number of investors who prefer full service brokerages when deciding where to buy penny stocks.  Full service brokerages though typically more expensive, offer a much greater level of service for investors including general investment advice, executing trades on your behalf, and even recommendations on which stocks to buy and when to sell them.  For investors with limited knowledge, particularly those who wish to buy penny stocks, a full service brokerage could be a good choice.  Just be sure you go with a reputable company you find a stock broker you can trust and that has experience buying penny stocks.  Some of the better full service brokerage houses include JPMorgan, AG Edwards, Merrill Lynch, Morgan Stanley, and UBS Financial Services.

Money Manager / Investment Advisor

Finally, for those who not want to even think about which trades to perform and when, you can find a Money Manager also known as an Investment Advisor.  Though most people think of money managers as those who manage mutual funds, money managers can actually manage any type of investment. A money manager is someone who will manage your account, make trades based on their expertise, and keep you up-to-date on the progress of your account.  Though some money manager are tied to brokerage houses there are still many who are completely independent.  Now since our focus is with penny stocks, you will want to find one who has a proven track record trading them.  Finally if you choose to have a money manager, it’s very important to find one you can trust and that has a strong reputation in the financial industry.

How To Buy Penny Stocks Using a Discount or Full Service Brokerage

One of the first questions you may have is how to buy penny stocks.  Before we get there though, you should first understand a little about what penny stocks are.

Penny stocks, also known as nano stocks, dollar stocks, and micro cap stocks are by definition any stock trading below $5 per share.  As such, penny stocks do not typically trade on major stock markets like the National Association of Securities Dealers (NASDAQ) or the New York Stock Exchange (NYSE), unless of course the stock temporarily dips below $5.  Instead, you will find penny stocks listed on the over-the-counter (OTC) and the Pink Sheets markets.  Unlike the OTC however, the companies listed on the Pink Sheets market do not need to file current financial reports with the Securities and Exchange Commission (SEC).

So, how to buy penny stocks?  Well, similarly to buying other types of stocks, your main two options for buying penny stocks are via a full service brokerage or using a Discount Brokerage account.

Full Service Brokerage

Using a full service brokerage will mean dealing with a real live stock broker.  You give your broker (usually done over the phone) the number of shares you wish to buy, the maximum price you wish to pay, and the ticker symbol of the stock.  The stock broker would then attempt to purchase these stocks on your behalf.  The stock broker gets payed either through a commission per transaction or more commonly through principle transactions, meaning they would make money on the difference between the bid price and ask price, known as the spread.  The main advantage to using a full service brokerage account is that your stock broker can typically give you investing advice as well as facilitating the trades for you.  The main disadvantage however, is these services are typically expensive.  If you decide on a stock broker, be sure to find one that is reputable and trustworthy with a solid track record.

Discount Brokerage

Alternatively, you may create an account with a Discount Brokerage firm.  Once you’ve created an account, you can make trades online and with relatively little effort.  The main advantage with a discount brokerage account is that it’s much cheaper than using a full service brokerage but you need to know what your doing so it’s not advised for novice investors.  Also, for very thinly traded penny stocks, you may simply not be able to execute your desired trades for the price you want without the use of a stock broker who has more resources at hand.

Knowing how to purchase penny stocks is one thing but knowing what stocks to buy and when to sell them is another.  Remember, trading penny stocks has a very high risk attached to it.  Yes the rewards can also be great, but you need to know what you’re doing so whatever you do, don’t just go off and start buying random penny stocks hoping they’ll appreciate in value.  Get educated first.