Making Money with Penny Stocks
by: Terry Jones
I am constantly surprised when I see article after article telling me how easy it is to make thousands, if not millions in the stock market with penny stocks.
Just recently I stumbled across an article, a very naive one at that which stated that if you investing $1000 in a stock, and it doubled, and you repeated that over 10 years, you would have over a million dollars. Well, if a 1000lb golden meteorite came crashing through my roof, I would also be a millionaire, which is about as likely doubling your money every year.
Forget everything you have read that says you can make easy money in the stock market, it is just not true, for if it was, we would all be millionaires by now.
Making serious money in the markets takes some serious research and patients. Some say the markets are like a casino, you are gambling your money, this is not true. In a casino, the house has better odds at keeping your money by the end of the day, in the stock markets, you are in control of how much risk you are taking, which brings me to the first of three important step of making money in the markets:
Managing Your Risk
Risk management is the name of the game. Its as simple as setting a stop loss order. You will see this option in your online brokers interface, when you place an order, you can set a level at which you want to get out of a stock automatically. For example, you buy 100 shares of Intel at $25, you can immediately set a stop loss order so that if the stock drops below $23, your account will sell the shares, with or without you being around. This stop loss strategy will take the emotion out of your selling if it is moving against you. If you take care of your losses, the profits will take care of themselves.
Fundamental Analysis
When it comes to penny stocks, fundamentals are tricky. Most penny stocks do not have earnings or even revenue to start, thus ratios such as PE might not apply. Earnings for small companies can fluctuate wildly between quarters which makes accurate fundamental screens difficult The important factor to consider here is the share structure of the penny stock, the 'tighter' the share structure, the better the odds of the stock moving on good news. As an example, penny stock 'A' trading at 1c with 100M shares outstanding (the amount of shares the company has) will have a market cap (the total dollar value of the company) of $1M. Company 'B' trading at 10c, but with 10M shares outstanding will also have a market cap of $1M. Company 'B' has a tighter share structure, and if all other factors are the same, it would be the more attractive of the two.
Technical Analysis
Technical Analysis (TA) refers to the study of a stock chart, identifying previous patterns and applying them to current trends in order to predict an outcome. Technicals can actually be applied to any chart, not only stocks, since there are a finite group of possible patterns, being able to identify them can help in predicting future trends. Since fundamentals may not be very helpful in selecting penny stocks, techincals are increasingly important. The most basic of indicators would be support and resistance levels, you can easily identify these by joining two or three extreme lows with a straight line, then project that line to the right of the chart, this would be a support line. The opposite holds true, connect two or three peaks in the chart, then project the line to the right, this would be a resistance level. By adding support and resistance levels to your stock charts, you can identify favorable entry and exits.
These are the basics to investing and penny stocks, by taking a few hours to educate yourself with the these concepts you will be able to limit your risks and increase your odds of being a successful investor over the long term!
About The Author:
Terry Jones is a participant in the HotStockMarket.com message boards.
To learn more about technical analysis, visit the http://www.hotstockmarket.com
March 2006
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