Have you ever thought about investing in stocks?
If so, you might have checked out your prospects on NASDAQ and ran away crying because of the dollar signs you saw next to the ticker tags.
“Google is selling at $600? I could get an Ipad for that.”
That’s truly a long-term investment, and unless you have an extra $30,000, it’s probably not going to mean much for your wallet. But what about a simple way to invest with a quick turnaround and the ability to buy in bulk?
Fortunately, they have that.
It’s a nice little package called penny stocks. Penny stocks, as you might imagine, are called so because they are cheap. As a rule of thumb, they are shares which sell for less than a dollar. Some actually even go for pennies (hence the buy in bulk).
When my friend, Ryan, brought this different way of investing up to me, I was skeptical. It sounded a little sketchy and a little more untrue. But when I watched him turn his diligence into a string of profits, I had to take another look.
That’s when I realized: If NASDAQ and other markets are an eight-mile stretch of bumper-to-bumper traffic, then penny stocks are the autobahns. They’re a fast-moving, energetic way to turn profits in days.
I was sold. I picked Ryan’s brain for all he knew, and lo and behold, it was a cinch to understand.
And when you understand them, profiting on penny stocks can be easy.
So I’ve got you covered on the understanding part, you just strap in for the ride.
Here are the dos and don’ts for maxing out your profits on this lesser-known market.
Understand the risk
First and foremost, realize that penny stocks are the most volatile on the market. That’s because they aren’t traded often. So when they are, it can spell titanic changes for the stock price.
And because there are fewer transactions, at times it can be hard to sell a stock. While you might not realize it, demand does play its part. You could have a summer home in France, but if you can’t get rid of it when you have to, it might as well be nicely-painted firewood (a little extreme, but you get the point).
On top of this, penny stocks aren’t traded on the big markets. They are sold on sites such as Over the Counter Black Board and Pink Sheets. Companies get onto these markets with fewer regulations than on other markets like NASDAQ.
With less regulation, it is far easier for companies to make up false gains and fool possible shareholders.
But realizing these pitfalls is 75% of avoiding them. Follow through on your research, and you will stay way ahead of the curve.
Cover your basics
No good money-making plan comes without due diligence, and if you are starting from scratch you’ll need to know three fundamentals skills for doing it. Within days, you should be able to master balance sheets, income statements and cash flow statements.
It sounds boring, but often times you only need the most important information from them. TIP: Don’t trade before you learn this.
Here’s a fast guide on how to use these sheets:
- Balance sheets give you the basics about how much a company is worth (aka assets).
- Income statements show a business’s recent earnings. A company pulling in significant income would be your stud, while a company managing little profit might be stale.
- Cash flow statements show how much money is going into and out of a business. Are they actively bringing in sales and clients while investing money for growth? Or are they throwing their cash around like a six-year-old at an ice cream truck?
Investopedia is a straightforward site that will tell you anything you need to know about these sheets in the simplest terms possible.
Look for prospects
Finding the companies to invest in is the fun part. Sure, you can pay for tips, but provided I have the time to do research, I always choose the free route.
Newsletters and forums are easily the best way to find investments. But when searching for “Penny stock forums,” you might find your search a little overwhelming. The market is full of people trying to give advice on these fast-moving stocks. If that doesn’t tell you it’s worth it, I don’t know what will.
At first, I had trouble deciphering up from down with all the options I had. “That’s why you let others do it for you,” Ryan told me right before he gave me an airtight time-saving tip. Imagine all those tips condensed into one searchable site.
On a little piece of paper, he wrote Stockreads.com.
Finding good companies is like an interview process: Take it one step at a time. Essentially, the two are one in the same. At the heart of it, you’re looking for someone to make you money.
So dig a little deeper. Get a hold of the financial records (balance sheet, etc.) and ask some questions.
- On the income statement, check if they are bringing in money consistently each quarter. Skip this step and you could end up buying an ice cream shop in Ohio in the middle of winter.
- While looking at the balance sheet, compare the company’s debt to its assets. A healthy company should have less than half the amount of debt in relation to its assets. In other words, if they have $2 million in assets and $1.5 million in debt, it’s a red flag.
Once you are well-versed on your sheets, this won’t take you more than five minutes.
Review the industry
These aren’t your Grandpa’s stocks. Whereas looking three years into a company’s history might work for well-entrenched stocks like Google, many penny stock companies haven’t been around that long.
So look at similar companies, also known as sector analysis.
Check out how other businesses in the same industry are faring. Have they been in the news? “No” is usually a good thing. Besides googling the name of your company, check out their competitors and the industry in general.
TIP: This is the stage to be wary of something fishy happening (like companies falsely ballooning their shares). The best way to avoid this is to keep high standards. Stay away from the “iffy” companies, and you’ll never get burned.
Read the warnings from regulators
Once it’s narrowed down to a handful of companies, move one step further. You’ve searched the company’s name, but find its officers. If you can’t find the names of a company’s officials, discard them like yesterday’s news. Once you do find them, read up.
- Have they or the company had any money problems?
- Was anyone the subject of illegal trading or some other scandal?
- Are any of the officers former employees of Enron?
If so, you get the idea.
The Securities and Exchange Commission (SEC.gov) easily lets you find this information on companies using either the company name or ticker.
Check how much information is available about the company
As mentioned before, these stocks are subject to less regulation. This could mean they aren’t registered correctly, or not all company information is available to investors.
The way I figure out if a company has enough information to make me comfortable is the web site OTCMarkets.com (Don’t thank me, thank Ryan).
Listed companies are broken into three tiers based on how much information they provide to you. The top tier, OTC QB offers the most information, whereas OTC Pink offers the least.
For you own comfort, remember: The more information you find, the better.
Be sure you’ve found the best
Considering it’s your money, this should go without saying. Always double check your decisions.
- Rehash what makes you think this stock will do well
- Take another quick look at the industry.
- Make sure having a cool logo isn’t part of the logic behind your choice.
Staring at the computer screen for an extra hour will often yield more confidence in a company or even a better deal. If it does, it made all the difference.
Have an entry and exit plan and stick to it
Know what you want from a stock when you buy it, and you’ll avoid floating in a sea of less return.
For example, let’s say you buy a stock at $0.05. How long should you hold onto said stock? As a rule, set a (close) ceiling and a floor for how far you’re willing to go. If the stock makes it up to $0.07, sell it. Don’t get comfortable and tempt fate. This is stock trading, not a poorly made horror film.
On the flip side, if the stock goes down to $0.03, get out and don’t look back.
DON’TS of trading Penny stocks
- Don’t invest money you can’t stand to lose. This is the fundamental rule of trading, and money in general.
- Don’t put all your fuel on the same fire. The safest way to see returns (and to gain experience) is to put your money into different stocks. Two or three is the best number to avoid stretching yourself too thin.
- Don’t buy stock in industries you don’t like or understand well. Take your industry into consideration. If you’re in IT, you’ll have a lot better idea about the market for wireless routers than an underwater welder. While that might not put you ahead, at least you aren’t behind.
- Don’t invest in companies that aren’t traded in volume (aka a lot and often). Search the amount of daily transactions made with a company’s stock. Look for companies with a lot of trades day in and day out. This will ensure all the transactions are not just from one investor. It will also help you make sure once you do turn a profit, you can turn that into cash.
- Don’t be too trusting. When researching a company, ALWAYS be wary if you can’t find all the information to make an informed decision. Sure this could be a fluke, but they could also be hiding something.
Follow this plan and you’ll see results. When it comes to this game of quick return, you are only limited by the knowledge you can absorb.
[Editors Note: If you want a "hold me by the hand" solution to cashing in on one of the greatest opportunities out there for mushrooming small amounts of cash to monumental wealth, you might want to consider grabbing what James Connelly, A.K.A "The Penny Stock Prophet" has in store for you on his website.]