For investors who can’t afford shares of Google or Apple,
the potential gains from trades like this are too good to pass up.
So penny-stock trading thrives. With a relatively small investment
you can make a nice return if — and this is a big if — the trade works
out. For example, say you buy 10,000 shares of a $.30 stock for $3,000.
If the stock reaches $1, you’ve made $7,000, doubling your money
Dollars and sense
Penny stock promoters make sure to attach a disclaimer to
their email, Twitter, or Facebook page, and take advantage of
this language to embellish and deceive. Read more: Stock touts
prey on investors' inflation fears.
Penny stocks and their promoters also tend to stay one step
ahead of securities regulators, though just last month the
Securities and Exchange Commission charged a Florida-based
firm, First Resource Group LLC, with penny-stock manipulation.
Read more: Simple rule: Don't buy a penny stock.
Even with these clear dangers, some people insist on trading
the pennies. So, if you find yourself on the receiving end of a
telephone call from a penny-stock promoter, or you spot an
advertisement that promises dollars from your pennies — and
you still decide that maybe penny stocks aren’t wooden nickels,
just remember these 10 rules:
1. Ignore penny-stock success stories
Timothy Sykes, a penny-stock expert who trades both
long and short, says you must not believe the penny-stock
stories that are touted in emails and on social media websites.
“You have to say no,” Sykes said. “You can’t invest in penny
stocks as if they were lotto tickets, but unfortunately that’s what
most people do, and they lose again and again. Think of penny
stocks as inmates in a prison that you can’t trust.”
Instead, Sykes says, focus on the profitable penny stocks with solid
earnings growth and which are making 52-week highs.
2. Disregard tips and read the disclaimers
Penny stocks are sold more than bought — mostly via tips
that come your way in emails and newsletters.
“The free penny-stock newsletters are not giving you tips out
of the goodness of their heart,” Sykes said. “If you read the
disclaimers at the bottom of the newsletters, they are getting
paid to pitch a stock because their investors want exposure for
the company. There is nothing wrong with wanting exposure, but
almost all penny newsletters make false promises about their
crappy companies.”
Sykes says there is a difference between stocks making a 52
-week high based on an earnings breakout and stocks making a
52-week high because three newsletters picked it. Reading the
disclaimers at the bottom of the email or newsletter, which the
SEC requires them to do, will usually reveal a conflict of interest.
“Most newsletters don’t tell you the truth,” Sykes said. “They
are being compensated to pump up the stock, and they rarely
tell you when to sell. Often it’s far too late.”
3. Sell quickly
One allure of penny stocks is you can make 20% or 30% in a
few days. If you make that kind of return with a penny stock,
sell quickly.
Unfortunately, many traders get greedy, aiming for a 1,000%
return. Considering that the penny stock you’re in might be
getting pumped up, take any profits and move on.
4. Never listen to company management
In the murky penny-stock world, don’t believe what you hear
from companies.
“You can’t trust anyone,” Sykes said. “The companies are trying
to get their stock up so they can raise money and stay in business.
There is no reliable business model or accurate data, so most penny
stocks are scams that are created to enrich insiders.”
Sykes says large rings of the same people run promotions using
different press releases and companies, including the reappearance
of a notorious stock manipulator who was first convicted for an email
pump-and-dump scheme when he was in high school.
5. Don’t sell short
Although shorting pumped-up penny stocks may seem
attractive, don’t do it.
Penny stocks are too volatile, and if you’re on the wrong side
of the trade, you could easily lose 50% or more on a short
squeeze. Another problem is that it’s difficult to find shares
of penny stock to short, especially those that made huge
moves based on hype and newsletter tips. Leave shorting
penny stocks to the pros.
6. Focus only on penny stocks with high volume
Stick with stocks that trade at least 100,000 shares a day. If
you trade stocks with low volume, it could be difficult to get out
of your position.
“You must be aware of the number of shares traded and
the dollar volume,” Sykes said. He also suggests that you
trade penny stocks that are priced at more than 50 cents a
share. “Stocks that are trading less than 100,000 shares a
day and are under 50 cents a share are not liquid enough to
be in play,” he added.
7. Use mental stops
Because the bid-ask spreads on many penny stocks can
be high, as much as 10%, hard stop-losses can actually
cause you to lose money.
Although it takes more concentration, use mental stops.
“I focus more on risk-reward than stops,” Sykes said. “If I want
to make a dollar a share on a three-dollar stock, I will cut my
losses at 20 cents so I have a 5:1 risk reward. I aim for 3:1 or
4:1, but not 1:1 or 2:1. If I think a dollar stock has only 50-cents
upside (2:1), my mental stop loss will be at 10 cents because the
risk-reward is better.”
8. Buy the best of the bunch
Sykes looks to buy penny stocks that have had an
earnings breakout.
“I love buying penny stocks when they have good earnings,
or when they are breaking out to 52-week highs on volume
that is at least a quarter million shares a day,” he said. “They
are easy to find if you look.”
The challenge is to find stocks that make 52-week highs that
aren’t due to a pump-and-dump scheme. Examples of penny
stocks that have fit Syke’s criteria in the past include Tangoe
TNGO, -1.81% , Magal Security Systems MAGS, +1.99% ,
and Staar Surgical Co. STAA, -0.46% .
9. Don’t trade large positions
“You really need to be careful with position sizing,” Sykes said.
“I learned the hard way not to trade big. My rule now is not to
trade more than 10% of the stock’s daily volume.”
In addition, he said, limit your share size so you can get out of
the stock faster.
10. Don’t fall in love with a stock
Every penny stock company wants you think it has an exciting
story that will revolutionize the world. If you enter the penny stock
arena, be cynical, do your own research, and diversify, even if a
friends or family member is touting a stock.
Penny stocks have earned their bad reputation, so beware.
the potential gains from trades like this are too good to pass up.
So penny-stock trading thrives. With a relatively small investment
you can make a nice return if — and this is a big if — the trade works
out. For example, say you buy 10,000 shares of a $.30 stock for $3,000.
If the stock reaches $1, you’ve made $7,000, doubling your money
Dollars and sense
Penny stock promoters make sure to attach a disclaimer to
their email, Twitter, or Facebook page, and take advantage of
this language to embellish and deceive. Read more: Stock touts
prey on investors' inflation fears.
Penny stocks and their promoters also tend to stay one step
ahead of securities regulators, though just last month the
Securities and Exchange Commission charged a Florida-based
firm, First Resource Group LLC, with penny-stock manipulation.
Read more: Simple rule: Don't buy a penny stock.
Even with these clear dangers, some people insist on trading
the pennies. So, if you find yourself on the receiving end of a
telephone call from a penny-stock promoter, or you spot an
advertisement that promises dollars from your pennies — and
you still decide that maybe penny stocks aren’t wooden nickels,
just remember these 10 rules:
1. Ignore penny-stock success stories
Timothy Sykes, a penny-stock expert who trades both
long and short, says you must not believe the penny-stock
stories that are touted in emails and on social media websites.
“You have to say no,” Sykes said. “You can’t invest in penny
stocks as if they were lotto tickets, but unfortunately that’s what
most people do, and they lose again and again. Think of penny
stocks as inmates in a prison that you can’t trust.”
Instead, Sykes says, focus on the profitable penny stocks with solid
earnings growth and which are making 52-week highs.
2. Disregard tips and read the disclaimers
Penny stocks are sold more than bought — mostly via tips
that come your way in emails and newsletters.
“The free penny-stock newsletters are not giving you tips out
of the goodness of their heart,” Sykes said. “If you read the
disclaimers at the bottom of the newsletters, they are getting
paid to pitch a stock because their investors want exposure for
the company. There is nothing wrong with wanting exposure, but
almost all penny newsletters make false promises about their
crappy companies.”
Sykes says there is a difference between stocks making a 52
-week high based on an earnings breakout and stocks making a
52-week high because three newsletters picked it. Reading the
disclaimers at the bottom of the email or newsletter, which the
SEC requires them to do, will usually reveal a conflict of interest.
“Most newsletters don’t tell you the truth,” Sykes said. “They
are being compensated to pump up the stock, and they rarely
tell you when to sell. Often it’s far too late.”
3. Sell quickly
One allure of penny stocks is you can make 20% or 30% in a
few days. If you make that kind of return with a penny stock,
sell quickly.
Unfortunately, many traders get greedy, aiming for a 1,000%
return. Considering that the penny stock you’re in might be
getting pumped up, take any profits and move on.
4. Never listen to company management
In the murky penny-stock world, don’t believe what you hear
from companies.
“You can’t trust anyone,” Sykes said. “The companies are trying
to get their stock up so they can raise money and stay in business.
There is no reliable business model or accurate data, so most penny
stocks are scams that are created to enrich insiders.”
Sykes says large rings of the same people run promotions using
different press releases and companies, including the reappearance
of a notorious stock manipulator who was first convicted for an email
pump-and-dump scheme when he was in high school.
5. Don’t sell short
Although shorting pumped-up penny stocks may seem
attractive, don’t do it.
Penny stocks are too volatile, and if you’re on the wrong side
of the trade, you could easily lose 50% or more on a short
squeeze. Another problem is that it’s difficult to find shares
of penny stock to short, especially those that made huge
moves based on hype and newsletter tips. Leave shorting
penny stocks to the pros.
6. Focus only on penny stocks with high volume
Stick with stocks that trade at least 100,000 shares a day. If
you trade stocks with low volume, it could be difficult to get out
of your position.
“You must be aware of the number of shares traded and
the dollar volume,” Sykes said. He also suggests that you
trade penny stocks that are priced at more than 50 cents a
share. “Stocks that are trading less than 100,000 shares a
day and are under 50 cents a share are not liquid enough to
be in play,” he added.
7. Use mental stops
Because the bid-ask spreads on many penny stocks can
be high, as much as 10%, hard stop-losses can actually
cause you to lose money.
Although it takes more concentration, use mental stops.
“I focus more on risk-reward than stops,” Sykes said. “If I want
to make a dollar a share on a three-dollar stock, I will cut my
losses at 20 cents so I have a 5:1 risk reward. I aim for 3:1 or
4:1, but not 1:1 or 2:1. If I think a dollar stock has only 50-cents
upside (2:1), my mental stop loss will be at 10 cents because the
risk-reward is better.”
8. Buy the best of the bunch
Sykes looks to buy penny stocks that have had an
earnings breakout.
“I love buying penny stocks when they have good earnings,
or when they are breaking out to 52-week highs on volume
that is at least a quarter million shares a day,” he said. “They
are easy to find if you look.”
The challenge is to find stocks that make 52-week highs that
aren’t due to a pump-and-dump scheme. Examples of penny
stocks that have fit Syke’s criteria in the past include Tangoe
TNGO, -1.81% , Magal Security Systems MAGS, +1.99% ,
and Staar Surgical Co. STAA, -0.46% .
9. Don’t trade large positions
“You really need to be careful with position sizing,” Sykes said.
“I learned the hard way not to trade big. My rule now is not to
trade more than 10% of the stock’s daily volume.”
In addition, he said, limit your share size so you can get out of
the stock faster.
10. Don’t fall in love with a stock
Every penny stock company wants you think it has an exciting
story that will revolutionize the world. If you enter the penny stock
arena, be cynical, do your own research, and diversify, even if a
friends or family member is touting a stock.
Penny stocks have earned their bad reputation, so beware.
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