The Nature of Penny Stocks For anyone new to investing in penny
stocks, you should first be made aware of the differences
between these micro-cap stocks and the more conventional
blue-chip and mid-cap investments. Unlike buying shares in a
large, stable company like Ford or IBM, you are dealing with
speculative investments.
Penny stocks literally trade for pennies per share, or for as
much as a couple of dollars. The beauty of penny stocks, of
course, is that sometimes they 'grow up' and become mid-cap
stocks, multiplying in value hundreds of times over and making
many people very wealthy.
With penny stocks, also called micro-caps or juniors, you will
see much greater price volatility, and thus greater and quicker
gains and losses in asset values. It is precisely this
volatility which draws investors to the junior markets, as one
good pick could make you hundreds of times what you could ever
make on the larger markets.
Of course, there is more risk than buying bonds, blue chips or
defensive stocks - but this added risk is tempered with the
possibility of making the big gains. Most penny stocks, but not
all, are resource or technology companies who initially sold
shares in an effort to raise money for exploration or product
development programs. Many of the companies have large debt
loads and are not necessarily making more money than they are
losing.
However, it is the potential of a major, or even minor success
in their quest that often incites dramatic price climbs, and
this is where their value lies.
Profit Potential Modern Strategies Inc. owner of
http://www.pennystockinsider.com , has been in the business of
researching penny stocks for many years, and has become
effective at uncovering the best small cap investment
opportunities and the most rewarding profit situations in the
penny stock markets. There are several ways to profit from penny
stock investments. Modern Strategies Inc. has uncovered the most
highly rewarding investment situations.
Promotional Stocks - These issues may or may not have much
actual value. Promoters generate interest in these types of
stocks in an attempt to drive share prices higher. The promoters
own great amounts of shares and so they make more money the
higher the share price travels. Eventually, they sell their
holdings into the promotion and generate great personal profit.
Then they move on to the next project, leaving the original
stock and all its investors behind. Without the work of the
promoter, the promotional issue soon comes crashing down.
These are the type of stock investor hear horror stories about,
because many people often lose a good deal of money when they
are naive about promotional ploys. However, getting in on a
promotional stock early in its life cycle, and keeping an eye on
the actions of the promoter can be very, very rewarding. It's
like having a full time stock promoter doing everything in his
power to get the share prices of the stocks you own to go
through the roof, and investors who get in early can go along
for the ride!
Technical Precursors - Often technical analysis can reveal
patterns in the trading cycles of penny stocks. Sometimes these
patterns illustrate excellent buying opportunities, where the
underlying stock has a high probability of moving up strongly,
and only a low probability of declining in value. In addition,
there are sometimes situations where several positive technical
indicators combine at once to reveal that an issue is very
likely to increase strongly in price over a short time frame,
indicating that the particular issue is has excellent investment
potential.
Fundamental Strength - Fundamentals involve such criteria as
earnings, debt load, assets, and many others. It was long
thought that earnings were the major driving force behind share
prices, but Modern Strategies Inc. has since disproved this
theory as it applies to penny stock companies. Instead,
uncovering the best medium to long term investment opportunities
must be done through exhaustive analysis of company financial
statements. Investors should get involved with the companies
that are making the most money, have the most effective
management, and have improving trends in all factors of their
operations. As well, industry comparisons and the examination of
key financial ratios present clues as to which companies are
destined for higher share prices.
Proper fundamental analysis of penny stock companies will
generally reveal that there are about 2 or 3 superior investment
opportunities out of every 100 companies examined. These 2 or 3
excellent corporations often represent better investments than
90% of stocks on the large-cap markets like the NYSE.
Undervalued Situations - Sometimes companies see their share
price slide dramatically. There are occasions where this
decrease in price has very little to do with the underlying
fundamentals, and more to do with factors such as overall market
weakness, interest rate increases, or others.
Opportunity exists in such situations because the shares are
often 'unfairly valued' and a return to more realistic prices is
inevitable. There are often cases where companies have more cash
on hand per share than their share price, or have price to
earnings ratios as low as 5.0. Although there is much more to
uncovering the best undervalued situations, this is the basis
behind the concept.
Minimized Downside - Often the combination of technical analysis
and undervalued situations can reveal penny stock companies that
have tremendous upside potential, and have a very low
probability of declining in value to any significant degree.
These type of investments are excellent choices for penny stock
investors that are less risk adverse.
Special Notes About Penny Stock Companies Penny stock companies
change their names more commonly than other publicly traded
companies, and are also subject to more stock-swaps and
consolidations. In any of these events, your shares in your
account will be automatically replaced with the appropriate
stock by your broker and notice will be delivered to you.
For example, if you owned 5000 shares of EXO and for every 5
shares you were to receive 2 shares of LOR, you would find your
account holdings re-adjusted to reflect 2000 LOR which can be
traded as normal. You will no longer have the 5000 EXO.
On rare occasions, a penny stock company can become delisted.
This means that the shares will no longer trade on the exchange,
and if the company does not get listed on another exchange or
re-instated at a future date, you may be subject to a loss of
capital equal to 100% of the total investment. However, this is
a very rare occurrence, and there are simple ways to protect
yourself against it which are periodically discussed in Modern
Strategies Inc. publications. Delisting generally becomes a
greater concern for investors who intend to use a long-term
(several years) buy and hold strategy with penny stocks.
