Penny Stocks For Dummies

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