It Matters Little to the Stalwart Penny Stock-Bear Market, Bull Market or Dead-cat Bounce

It Matters Little to the Stalwart Penny Stock-Bear Market, Bull Market or Dead-cat Bounce

penny stocks

Over the last eight weeks [June, 2006] I've been spending a lot of time reading articles describing the current market conditions...trying to figure if it really affects penny stock investors.

Are we in a bull market...are we wading into a bear market. Or is the recent rally just a dead-cat bounce?

The dead cat bounce refers to a short-term recovery in a declining trend. There's a (relatively) old saying in investing: even a dead cat will bounce if it's dropped from high enough.

No matter how you slice it...I'm not sure it even matters to penny stock investors like you and me.

For example...stocks surged in Japan this week as reports showed growth in manufacturing and exports. Markets rose across Asia as investors were encouraged by Wednesday's gains on Wall Street.

Strong earnings reports from two bellwether stocks gave penny stock investors hope that rising interest rates wouldn't kill profits. The recent sell-off, said one economist was "just turbulence."

The turbulence, it seems, is continuing on this side of the pond. U.S. stocks traded flat to lower Thursday as the market took a breather as higher oil prices and downbeat economic data curbed Wall Street's momentum. So, what are we to believe, is the market heading up...or heading down?

How does the market look in general terms? As far as stocks are concerned, the S&P index is up just 0.3 percent for the year, the Dow is up 3.4 percent and the NASDAQ is down 2.9 percent. Not sparkling data.

But for penny stock investors, the recent roller coaster ride that many seasoned blue chip investors are reeling over, is just par for the course. We know that a penny stock is often volatile and just as unpredictable.

While a penny stock may be more vibrant when the market is upbeat, in general, a penny stock marches to its own tune. Why? Few investors venture into the field of penny stocks because they are either unwilling or unable to do the work required to accurately predict what these shares may do.

By their nature, it is nearly impossible to know what price a penny stock share should be trading at, and conventional financial ratios and industry comparisons are rarely effective measures for realizing a penny stock's value. Large one-day percentage gains and losses are not an uncommon occurrence for penny stock investors.

So really, bull, bear or cat...it's just another day at the computer screen for penny stock investors. The work may be fun...but it's not easy. Of the 14,000 public companies in the U.S., about 3,300 are considered penny stocks that trade on the OTC Bulletin Board operated by the NASDAQ.

Their visibility is low, chances are you've never heard of their CEO and I doubt they have any institutional following. And while they're highly speculative, the more promising ones have a targeted business plans, and solid positions in niche markets. And for now, they're flying under the radar of Wall Street

So what do you do in an unpredictable market like the one we're in? Continue applying the same principles you've always used when searching for that untapped penny stock. And enjoy the volatility.

5 Tips for Investing in Penny Stocks

5 Tips for Investing in Penny Stocks

penny stocks

Investing in penny stocks provides traders with the opportunity to dramatically increase their profits, however, it also provides an equal opportunity to lose your trading capital quickly. These 5 tips will help you lower the risk of one of the riskiest investment vehicles.

1. Penny Stocks are a penny for a reason.

While we all dream about investing in the next Microsoft or the next Home Depot, the truth is, the odds of you finding that once in a decade success story are slim. These companies are either starting out and purchased a shell company because it was cheaper than an IPO, or they simply do not have a business plan compelling enough to justify investment banker's money for an IPO. This doesn't make them a bad investment, but it should make you be realistic about the kind of company that you are investing in. 

2. Trading Volumes

Look for a consistent high volume of shares being traded. Looking at the average volume can be misleading. If ABC trades 1 million shares today, and doesn't trade for the rest of the week, the daily average will appear to be 200 000 shares. In order to get in and out at an acceptable rate of return, you need consistent volume. Also look at the number of trades per day. Is it 1 insider selling or buying? Liquidity should be the first thing to look at. If there is no volume, you will end up holding "dead money", where the only way of selling shares is to dump at the bid, which will put more selling pressure, resulting in an even lower sell price.

3. Does the company know how to make a profit?

While its not unusual to see a start up company run at a loss, its important to look at why they are losing money. Is it manageable? Will they have to seek further financing (resulting in dilution of your shares) or will they have to seek a joint partnership that favors the other company?

If your company knows how to make a profit, the company can use that money to grow their business, which increases shareholder value. You have to do some research to find these companies, but when you do, you lower the risk of a loss of your capital, and increase the odds of a much higher return.

4. Have an entry and exit plan - and stick to it.

Penny stocks are volitile. They will quickly move up, and move down just as quickly. Remember, if you buy a stock at $0.10 and sell it at $0.12, that represents a 20% return on your investment. A 2 cent decline leaves you with a 20% loss. Many stocks trade in this range on a daily basis. If your investment capital is $10 000, a 20% loss is a $2000 loss. Do this 5 times and you're out of money. Keep your stops close. If you get stopped out, move on to the next opportunity. The market is telling you something, and whether you want to admit it or not, its usually best to listen. 

If your plan was to sell at $0.12 and it jumps to $0.13, either take the 30% gain, or better still, place your stop at $0.12. Lock in your profits while not capping the upside potential. 

5. How did you find out about the stock?

Most people find out about penny stocks through a mailing list. There are many excellent penny stock newsletters, however, there are just as many who are pumping and dumping. They, along with insiders, will load up on shares, then begin to pump the company to unsuspecting newsletter subscribers. These subscribers buy while insiders are selling. Guess who wins here. 

Not all newsletters are bad. Having worked in the industry for the last 8 years, I have seen my share of unscrupulous companies and promoters. Some are paid in shares, sometimes in restricted shares (an agreement whereby the shares cannot be sold for a predetermined period of time), others in cash. 

How to spot the good companies from the bad? Simply subscribe, and track the investments. Was there a legitimate opportunity to make money? Do they have a track record of providing subscribers with great opportunities?  You'll start to notice quickly if you have subscribed to a good newsletter or not. 

One other tip I would offer to you is not to invest more than 20% of your overall portfolio in penny stocks. You are investing to make money and preserve capital to fight another battle. If you put too much of your capital at risk, you increase the odds of losing your capital. If that 20% grows, you'll have more than enough money to make a healthy rate of return. Penny stocks are risky to begin with, why put your money more at risk?