We're thinking of coming up with a penny stock newsletter - what do you think? Would this be valuable to you?
Becoming a great penny stock investor is not about blindly buying and selling random stocks that you see. You need a plan. A strategy to guide you towards a the path to success. Today we will provide our top 5 investment strategies as a example of tips that we're considering for our penny stock newsletters. Follow these strategies and you will find yourself making better investment decisions and fewer mistakes on your journey to making big profits.
#1 - Find The Best Fishing Spots
A generally accepted definition of penny stocks is that they are stocks that are priced at $5.00 or lower. This definition includes the entire universe of stock exchanges and the stocks contained in them. However, all penny stocks are not created equal. Nor are all exchanges that penny stocks trade on.
One of the best ways to remove unworthy candidates for your consideration is to only trade penny stocks on certain exchanges. Small companies from countries outside of North America might very well be great companies. But without knowing the regulatory statutes, government laws and other local or regional risk factors it is generally not worth it to pursue these stocks.
The best and most promising companies usually want to be listed on a U.S. or Canadian exchange. To put it bluntly - this is where the money is. Companies that want access to capital markets and fund raising availability prefer American and Canadian exchanges because they allow a greater pool of opportunity.
NYSE MKT Listing Requirements
Some of the most promising and reliable penny stocks are found on the New York Stock Exchange Market Exchange (NYSE MKT). The NYSE MKT has very strict and clear guidelines for allowing companies to be listed. As of this writing, the minimum requirements for a penny stock to be listed include the following:
|Standard 1||Standard 2||Standard 3||Standard 4a||Standard 4b|
|Market Value of Public Float||$3MM||$15MM||$15MM||$20MM|| $20MM|
|Operating history||-||2 Years||-||-||-|
In addition to fulfilling the requirements listed in the above table, companies must also meet at least one of the following criteria:
|Option 1||Option 2||Option 3|
|Daily Trading Volume||-||-||2,000 shares|
It is important to note that selecting penny stocks that are listed on the NYSE MKT will give investors a de-facto purchasing filter of stocks with a floor of $2 and a ceiling of $5. Please remember that there are stocks that can trade on the NYSE MKT that have a share price above $5 but this means that they do not meet our standard definition of a penny stock investment.
NYSE MKT Annual Fees
Once a company is listed on the NYSE MKT exchange, there are fees that must be paid. After paying an initial $25,000 fee to begin listing on the exchange there are annual fees that must be paid. Information from the NYSE site including:
|Type Of Security||Minimum Fee||Fee Per Share|
|Primary Class Of Shares||$52,500||$0.001025|
|Each Additional Class Of Common Shares||$20,000||$0.001025|
|Primary Class Of Preferred Stock||$52,500||$0.001025|
|Each Additional Class Of Preferred Stock||$5,000||$0.001025|
|Each Class Of Warrants||$5,000||$0.001025|
So In addition to the many things that a penny stock company needs to worry about, exchange listing fees can take a significant amount of money to maintain! To be fair, being listed on this exchange allows exposure to a very big market of investors and traders. But what is a company to do if the fees are to much to maintain and the share price can not stay consistently above $2?
Alternatives To The NYSE MKT
Fortunately, companies that do not qualify to be listed on the NYSE MKT have other alternatives. One of the better alternatives is a listing on the Over The Counter Bulletin Board Exchange (OTCBB). This should not be confused with stocks that are being traded over the counter (OTC) or on what is known as the Pink Sheets. This is often confusing because the names are so similar. There are gigantic differences between these two markets so be extra careful to discern between the two.
The OTCBB is managed by the Financial Industry Regulatory Authority (FINRA), and has much more relaxed listing requirements than the NYSE MKT. One of the major differences is that there are no minimum price requirements for share listings on the OTCBB.
OTCBB Listing Requirements
In fact, the primary requirement of being listed on the OTCBB is that the company must be registered with the Securities and Exchange Commission (SEC) or other required federal agency. The company must also remain current in all required filings with these federal agencies.
It can be stressed again that an investor should not confuse other markets like the OTCQX, OTCQB, Pink Sheets, or any OTC market. Always remember: NYSE MKT and OTCBB exchanges only!
So there you have it! The first strategy that we would use is to choose stocks from a reputable exchange. We have narrowed down the exchange selection to either the NYSE MKT or the OTCBB. Sticking with stocks from these exchanges gives you peace of mind that the companies are filing proper financial reports and have some minimum standard of operations.
#2 - This Is Not Poker: Never Go All In
The excitement of finding a company that looks like it has outstanding potential is truly a great feeling. The temptation to go “all in” and spend all of your trading budget in one trade can be overwhelming. Remembering that an investment program is a marathon and not a sprint can help to temper such emotion based spending.
One method to try is to buy stocks at set times every month. For example, if you have $5,000 that you want to use to purchase a certain stock try buying $500 per month for the next 10 months. This way you can reduce several risks to your portfolio. One of the main risks is that the company experiences some type of crises that causes the share price to plummet. The impact to you would be only what you had invested up to that point instead of the total amount of your funds.
This method also allows you to do a better job of timing your purchases. If a major announcement comes out that you feel is going to cause shares to go up then you can buy at that time. Conversely if it looks like something is going to cause the share price to go down (severe weather, unfavorable information, etc.) then you can hold off on purchasing more stocks.
Buying stocks on a systematic basis allows an investor to observe the company and how the price reacts over a longer period of time. Once in investor is more confident that a stock has long term viability they can increase the investment amount or frequency.
Dollar Cost Averaging
This idea ties into the concept of dollar cost averaging. When an investor buys at a set interval it smooths out the effect of the daily ups and downs of a stock price. If an investor purchased shares using a fixed amount of money per month, they would buy more stocks if the price were to have dropped. If the price rose for that month, they would buy fewer shares.
Let’s give an example: For a $100 per month program, an investor would purchase 20 shares if the stock price was $5/share. If the price dropped to $4 the next month then the investor would purchase 25 shares. This is a proven method to implement part of the well known investment saying of ‘Buy low and Sell high’.
The goal of this second strategy is to buy stocks over the long term. Do not buy all of your shares at once. Spread your stock purchases over time and perform buying on a systematic basis.
#3 - Always Follow The Rising Tide
Stock prices generally meander up and down within a channel. Occasionally something will cause the stock price to move up or down and then the prices will resume trading within a channel again. Over the long term an investor wants this price movement channel to be sloping upwards with a positive trend.
If prices start trending down a decision must be made how low the price can go before exiting the stock holding. Not all of an investor’s selections will be winners so a method must be in place to know when to pull the plug. An investor might come back to the same stock after it has recovered from a price drop but this requires extreme caution and a good reason to re-enter a position.
One plan of action might be to exit a stock holding if the price falls below its normal trading channel by a certain amount It’s often better to use percentage amounts rather than fixed dollar amounts so that you can evaluate all holdings in the same way.
Don't Fight The Trend
It is usually not a good idea to continue to purchase stocks as they are going down in price. Stocks do not gain in value as the share price goes down. Low prices do not mean that the stock is on sale and an investor should by as much as possible.
There is generally a reason that a penny stock price will decline over an extended period of time and it is not usually from anything that can be regarded as positive. Unless the broader market is in a downturn and dragging all other stocks down, it is vital to examine what factors could be causing the price of a stock to decline.
Keep in mind that it is never guaranteed that a company will turn around and the stock price will increase after a downturn. The price of a stock can go all the way to zero! A company can declare bankruptcy and all shares are then worthless. Even if a company re-emerges from a bankruptcy they will usually issue new stock and all old stock will continue to have no value at all. Many investors buy large amounts of stocks that are about to go bankrupt, thinking that they will make a large amount of money when the company comes out of bankruptcy. These investors often find out that they have just wasted their money!
Just like in boxing an investor must protect themselves at all times. If a stock is performing poorly do not hesitate to exit a position once it does not meet your investing criteria. If the stock price falls by a certain percentage then exit your position immediately. Do not hold on to it and wish and hope for it to turn around. You may very well see it go to zero and turn a trade that could have given some profit into one that becomes a total loss.
Stop-Loss And Trailing Orders
One of the best ways to implement this strategy is through the use of a ‘trailing stop-loss’ order. This is a great tool to use in order to provide discipline to your trading. A regular stop loss order is a set of instructions to your broker to sell shares in the event that the stock decreases to a certain price level. The stop loss price is static and is in place no matter how much a stock increases. A trailing stop loss order can be thought of as an auto-adjustable stop loss order. In a trailing stop loss order, an initial stop loss value is put in place (usually as a percentage of the original purchase price.) After a stock has increased by a certain amount a trailing stop loss can be put into place. This trailing stop loss will trail the highest price by a certain percentage or fixed amount (depending on the investor choice). This trailing feature allows a stock unlimited growth to the upside while maintaining a safety net against price decreases to the downside. The trailing stop loss price adjustments only occur upwards never downwards.
The beauty and power of the stop loss and trailing stop loss orders is that once they are put in place they are automatic. An investor can specify that for every 10% increase or $0.25 increase in share price the stop loss is increased by an equivalent amount. Many investors try to do this in their head. Unless an investor is extremely disciplined this can be a dangerous tactic to try. The reason is that it is way too easy to justify holding onto a stock for just a little while longer to ‘wait and see’. This can cause unnecessary delay in getting rid of an unprofitable position which causes increased losses.
Occasionally an investor holds on and the stock actually does reverse itself and make money. This is often an even worse scenario because it causes the investor to override a set of investment rules. It is just a matter of time before a rule is not followed and the result is a huge loss.
Let's follow up with an example using a trailing stop loss order: If an investor buys a stock for $3/share they can place an initial stop loss at $2.50. If the stock falls to $2.50 within a short time frame then the shares will automatically be sold at $2.50. However let’s assume in this example that the stock increases over time to $3.50/share. Now an investor can implement a trailing stop loss order at $3/share - basically a break even price. Once this trailing stop loss order is in place the trailing stop loss will increase as the stock price increases. The magnitude of the adjustments are made by the investor.
So if the stock price then increases to $4/share the trailing stop loss might adjust to $3.50/share - locking in a $0.50/share profit. If the stock price were to fall from $4/share back down to $3.50/share then an automatic order would be executed to sell the shares. This can help the investor because if the shares fall suddenly to $2/share the investor shares were still sold at $3.50.
Strategy #3 is about following a rising tide. Purchase stocks over time as they trend sideways or upwards. Use systematic purchases to accumulate shares of stocks while they are in a trading channel or have broken out of the channel to the upside. Use initial stop loss orders and trailing stop loss orders to limit downside risk and lock in profits as share price rises.
#4 - Mark It On Your Calendar
Companies provide information year-round on what they are doing and what their future plans are. They do this through press releases, annual and quarterly reports, newsletters trade conventions, and corporate website posts.
Many of these events are planned well in advance. An investor can know when a new product or service is scheduled for release. A press release may shed light on something that is anticipated but not confirmed. Or perhaps a press release can provide information that is totally unexpected. In any case it is important to an investor to know when a press release is scheduled and keep up with company announcements.
For companies in certain industries the news of a big government contract or approval can presage a significant increase in stock price. FDA approval for a new drug or vaccine can make or break the future of a company. An approved contract signing from a military agency can mean immediate long term viability for a previously struggling company.
Likewise the introduction of a new product can create buzz and excitement to a company. Think about the last time you couldn’t wait to buy the latest electronic gadget or toy. It is easy to imagine the impact that a successful product launch can have on any company. The impact for a penny stock company can be enormous.
Many times a company operates under the shadow of a lawsuit regarding copyrights or patents. If a company loses a copyright or patent lawsuit the effect can be devastating. Large settlements or fines may be imposed which can cause the share price to plunge dramatically. Winning a lawsuit can have the opposite effect. A victory can mean that the company is cleared to expand into new markets or proceed without further legal burden. A good investor must be aware of any major pending lawsuits and follow them to find out when a verdict might be rendered.
Don't Miss The Meetings
Shareholder meetings are an excellent way to gain insight into a company. Dates for shareholder meetings are commonly posted on a corporate website. Additionally the company may send out emails or postcards as a reminder. Investors should make it a point to attend these meetings. There may be topics that are not discussed outside of the meeting, or another shareholder might bring up a question that others had not considered.
The ability to meet other shareholders (investors) and exchange knowledge can often be a tremendous advantage. Regularly attending shareholder meetings, attending corporate conferences and even visiting corporate headquarters can provide deep insight into a company and even an entire industry. Processing information from a variety of people and sources is an excellent technique for honing investment skills.
Our Strategy #4 means staying abreast of what is happening with your investments. Stay up to date with the companies that you have invested in and be aware of their trajectory on a daily, weekly, monthly and even yearly basis. This will keep you poised to take action (buying or selling) without encountering too many unplanned surprises.
#5 - Don’t Overstay Your Welcome
This is both the easiest and most difficult strategy. We have discussed how to protect and take profits using Strategy #3. But how can an investor know when it is time to get out of losing position. If an investor buys a stock and it languishes at the entry price or slowly drifts downward, it can be extremely difficult for an investor to make the decision to sell shares at a loss. In reality it should be not difficult to sell shares that are costing money and freeing up that money so that it can be used to purchase something more profitable. For most people though, this is a very difficult exercise, which is why using a stop loss order is so valuable.
Watching the trading volume is another valuable indicator that can be used to inform an investor that it is time to exit. Watch the share price when trading volume shows a dramatic increase. Is the share price falling while this is happening? If so, this means that other investors are getting out of the stock at an increased rate.
Alternatively has the trading volume decreased significantly? This might indicate that the company is not able to attract any more investors. Use Strategy #4 to find out why. If the reason can not be identified then it is time to exit your position.
Finally, if the company just doesn’t feel like a good fit or there is something that an investor just can’t define - it is definitely time to exit your position. There are so many opportunities to be had that an investor need not feel uncomfortable about any portfolio positions.
The key to Strategy #5 is don’t hold onto losing positions. Exit your position and find another company that meets your selection criteria. Don’t be ‘married’ to any single position or company!
It’s Up To You!
Using these Top 5 Strategies listed in this post should put you on the path of being a very successful investor. A 6th Secret Strategy is this - always have fun with your investments. Let the process of researching companies and making buy/sell decisions and following your strategies be a wonderful journey. Investing in penny stocks should involve a lifetime of fun and enjoyment - so have fun!
In the meantime, we'll keep on developing the best penny stock newsletter that we can.
Do you want to be mentored by someone who has achieved success as a trader? Jason Bond is a self-made millionaire who lets others benefit from his experience and expertise by offering well-designed time-tested investment programs. Whether you want to get deep into stock trading or are just looking for great stock tips, he'll be able to give you what you need. Find out more here.