Penny Stocks For Dummies

Peter Leeds, also known as The Penny Stock Professional, is the publisher of Peter Leeds Penny Stocks, a popular financial publication with over 50,000 subscribers. He is also the author of Invest in Penny Stocks.

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 3

Beyond the Book 4

Where to Go from Here 4

Part 1: Getting Started with Penny Stocks 5

Chapter 1: Getting to Know Penny Stocks 7

A Big, Fat, “Tiny” Penny Stock Summary 8

Defining Penny Stocks 9

Price per share 10

Market capitalization 10

Stock market 10

Mix and match 11

Why does it matter? 11

Comparing Penny Stocks to Their Blue-Chip Cousins 13

Volatility and speed 14

Safety and risk 14

Investor following and visibility 15

Larger stones take more force to move 16

Chapter 2: Deciding If Penny Stocks Are Right for You 19

Gauging the Popularity of Penny Stocks 20

A high risk/reward ratio 20

Limited funds 22

Risky misconceptions 22

Taking Stock of the Big Business of Penny Stocks 23

You’re not alone 23

Room to grow 24

Making Sense of What You’ve Heard (Much of Which is True!) 25

Penny stocks represent low-quality companies 25

Penny stocks are subject to price manipulation scams 26

Trading penny stocks is a game of chance 26

Making a Fast Million Not! 27

Penny stocks appeal to the impatient 27

Newer investors gravitate to penny stocks 28

Penny stocks appeal to smaller portfolios 29

Being Honest with Yourself: Are Penny Stocks Right For You? 29

Chapter 3: Buying and Selling Penny Stocks 31

The Ins and Outs of the Stock Market 32

Factors influencing which exchange a company lists on 32

A who’s who of stock exchanges 34

Issuing Shares 37

Diluting a good thing 38

How dilution affects investors 39

When new share issues are a good thing 40

When new share issues are not a good thing 41

Stock Buybacks 42

Acquisitions and Takeovers 43

Why penny stock companies are frequently bought 45

Resisting a takeover 46

Understanding which companies are takeover targets 46

Being the buyer 48

Mergers and Amalgamations 49

Stock splits and reverse splits 50

Why you don’t see splits in low-priced shares 51

Why reverse splits are common in penny stocks 51

Bankruptcies 52

Chapter 4: Avoiding Promotions, Scams, and Bribes 53

Why Penny Stocks Are Perfect for Price Manipulation 53

Who is Moving the Price? 57

Promoters 58

Investor or public relations 58

The touter 59

The advisor 59

Rooting Out Poor Quality Companies 60

A good story 60

Financially broken 61

Weak business model 61

Swimming against the trend 62

The 2-pound gorilla 62

Obstacles That Even High-Quality Companies Face 63

Lawsuits 65

Lost customers 66

The 500-pound gorilla 67

Even the Good Can Die Young 67

Part 2: Research and Investment Strategies 69

Chapter 5: Developing a Strategy 71

Trading Risk Free without Using Real Money 72

Keeping it simple: What you need to get started 72

Setting your paper trading parameters 73

Some paper trading considerations 74

Tracking the success (or failure) of your paper trades 75

What You Need Before Your First Trade 76

Choosing a Great Broker 77

Penny-stock-friendly brokers 78

When to upgrade your broker 79

Types of Trading Orders 79

Bids, asks, and spreads 79

Limit orders 80

Market orders 81

Other types of orders 82

Characteristics of a Successful Penny Stock Trader 84

Investing Versus Trading 86

Investing in penny stocks 86

Trading in penny stocks 86

Chapter 6: Doing Your Research 89

Doing Your Due Diligence 90

Skimming the surface 90

Digging a little (or a lot) deeper 91

The Where’s and How’s of Research 92

Stock quotes 93

Trading charts 93

Stock screeners 95

Company financials 95

Press releases 96

Media outlets 97

Paid analysts 97

Investor relations 98

Penny stock newsletters 98

Message boards 100

Calling the Penny Stock Company 101

Be prepared before you dial 101

Questions to ask management or IR 102

Dead-end questions to avoid 104

How to interpret IR responses 104

Corporate and Analyst Guidance 105

Should you trust guidance issued by the company? 106

Following analyst guidance 107

Generating your own guidance data 107

How Expectations Drive Prices: Getting Baked in the Pie 108

Expectations are more important than results 108

Beating estimates 110

Missing guidance numbers 110

Penny Stocks Are Affected by Trends 111

Sector and industry trends 111

Trends in the overall market 113

Trends in consumer and social behavior 113

Market and Company Risk 115

Let the rising tide lift your boat 115

Investing against the current 116

Reacting to nonsystemic (company-specific) risk 117

Reacting to systemic (market) risk 117

Buying What You Understand: The Free and Instant Advantage 118

Chapter 7: Picking a Winner 121

Narrowing Your Choices 122

Your Elimination Criteria 122

Who Do You Trust? 124

Your number one ally: You 124

Considering the motives of others 125

Reviewing their track record 126

Paid advertisements: The wolf in sheep’s clothing 126

Unreliable analysts 127

Stock Screeners 128

Choosing criteria to focus your search 128

Screening your screens: Getting even more focused 130

What stock screeners won’t tell you 131

Choosing Penny Stocks Manually 132

Chapter 8: Penny Stock Manias 133

Wild Speculation and Investor Stampedes 134

Why manias affect penny stocks the most 135

The next stampede: It’s just around the corner 136

Penny Stock Manias of the Past: Learning from Other People’s Mistakes 137

Pot penny stocks 137

Bitcoin mania? 143

The dot-com bubble in penny stocks 150

Surviving and Profiting from Penny Stock Manias 153

Spotting the Next Mania 154

Why the next mania plays out 154

How the next mania plays out 155

Part 3: Trading Penny Stocks 157

Chapter 9: Trading Strategies 159

Scaling In and Scaling Out 160

Averaging Up Not Down 161

The many downsides of averaging down 161

The upsides of averaging up 163

Limiting Your Losses and Locking In Your Gains 163

Stop-loss orders 163

Position sizing 165

Diversification 166

Limit orders 167

Using only the best markets 167

Trading Windows 167

Timing Trades: When to Hold ’Em and When to Fold ’Em 168

Know when to take a profit 168

Know when to sell at a loss 169

Chapter 10: Fundamental Analysis 171

Financial Reports 172

The income statement 173

Balance sheet 174

The statement of cash flows 176

Numbers to Look for in Penny Stocks 179

Good numbers on the financial statements 180

Trends in financial results 184

Acting On Analysis 186

Management is Steering This Ship 187

Who’s who at the helm 187

What have these managers done before? 188

The corporate commitment level 189

News Releases and Events 191

Press releases from the company 192

Coverage from third-party sources 192

The timing of milestone events 193

The Outlook for the Sector and Industry 194

Microeconomic influences 195

Macroeconomic influences 196

Keeping your macros and micros straight 197

Chapter 11: Financial Ratios: Comparing Apples to Apples 199

Leveling the Playing Field with Financial Ratios 200

Eliminating size as a factor 200

Comparing stocks across industries 201

The Five Categories of Financial Ratios 201

Liquidity Ratios 202

Current ratio 203

Quick ratio 203

Cash ratio 204

Operating cash flow 205

Activity Ratios 206

Inventory turnover 207

Receivables turnover 207

Payables turnover 208

Working capital turnover 209

Fixed asset turnover 209

Total asset turnover 210

Leverage Ratios 211

Debt ratio 211

Debt to equity 212

Interest coverage 212

Performance Ratios 213

Gross profit margin 214

Operating profit margin 215

Net profit margin 216

Return on assets 217

Return on equity 217

Valuation Ratios 218

Price to earnings 218

Price to earnings to growth rate ratio 220

Price to sales 220

Price to cash flow 221

Chapter 12: The Abstract Review in Penny Stocks 223

Making Products Meaningful with Branding 224

Why branding is more important with penny stocks 225

When branding is done well 226

Harnessing a Unique Selling Proposition 227

Ensuring Product or Service Acceptance 228

Market Share 229

How to find out the market share for a penny stock 230

Profit from changes in market share 230

Barriers to Entry 231

Gauging barriers to new competition 232

The best first movers are the small ones 232

Marketing Strategy and Results 234

Poor marketing is bottomless 234

Marketing is hard to track with penny stocks 235

Loyalty and Attrition 236

Customer turnover 237

Relative order sizes and frequencies 237

Chapter 13: Technical Analysis with Penny Stocks 239

When Technical Analysis is Good 240

Why TA Often Doesn’t Work with Penny Stocks 243

Use Technical Indicators to Spot Trading Opportunities 244

All Patterns Break Down 246

Technical Analysis That Will Work with Penny Stocks 247

Clues from trading volume 247

Support levels 248

Resistance 250

Trends are friends 251

Price spikes 252

Price dips 253

Topping out patterns 254

Bottoming out patterns 256

Consolidation patterns 257

On-balance volume 260

Momentum indicators 261

Moving averages 262

Relative strength 263

Part 4: Scaling Up Your Success 265

Chapter 14: The Surprising Power of Mental Focus 267

Taking a Situational Audit 268

Unless you increase your time and energy 268

When the weeds envelope you 269

Why the dearth of quality? 271

Are Your Expectations Realistic? 271

Truly knowing yourself 272

The purpose is deeper 273

Goals? Not everyone needs them 273

The first step is the longest 273

Your Penny Stock Plan 274

Frequency and fine-tuning 276

You do not get to have luck 276

Take a forced rest 277

Chapter 15: Finding the One Strategy That Works 279

Your Solo Strategy 280

Do less of what doesn’t work 281

Rinse and repeat 282

Simplicity is misunderstood 282

One Penny Stock Truth Above All 282

Dancing on quicksand 283

Changing landscape 283

Adapting to What’s Next 285

Creating a Ritual 286

Shrine, studio, war room, or kitchen table? 287

A statement of commitment 288

Opportunity Costs and Your Results 288

Unseen small investments for major gains 289

Extrapolate your destination 289

Chapter 16: Debriefing for Dollars and Cents 291

Your Opinion is Your Mental Blind Spot 292

Comparing results to expectations 292

Comparing expectations to environments 293

The intentions-to-profits contrast 295

The assumptions you were given 296

Media Imagery and Misunderstandings 297

Tunnel-vision gurus 297

Trusted friends and family 298

Buying excitement 298

Building Your Investing Power 299

Collect 100 mistakes 301

List your lessons 301

Take an emotional assessment 303

Change yourself to change your results 303

Part 5: The Part of Tens 307

Chapter 17: Ten Rapid Result Tactics 309

Call the Company 310

Average Up 310

Don’t Confuse Market Risk with Company Risk 311

Try the Product, Use the Service 312

Compare the Wares 313

Paper Trade 313

Know the Corporate Life Cycle 314

What’s Really Driving the Share Price? 315

Watch the Short Interest 316

Don’t Diversify, Pinpoint Invest Instead 317

Chapter 18: Ten Trading Truths 319

Investor Sentiment is Contrarian 319

Big Moves Occur During Brief Trading Windows 321

Greater Volume Means Greater Sustainability 321

Making Up for Losses is Harder than Preventing Them 322

Bigger Things Take More Energy to Move 322

Rapid Rise, Rapid Fall 323

Dilution Disguises Losses 324

Buy the Rumor, Sell the Fact 324

Don’t Try Catching Falling Knives 325

Resistance Levels Can Flip 326

Chapter 19: Ten Key Considerations for Companies 327

Barriers to Entry 327

Competitive Advantages 328

Market Share (and Room for Growth) 329

Customer Diversity and the Company’s Reliance 330

Allies 331

Insider Ownership 331

Institutional Ownership 332

Positioning 333

The Secret of Flag Fall Fees 333

It’s All About Recurring Revenues and Attrition 334

Index 337