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Penny Stocks

According to a Well-Known, Major Investment Firm These are Some of the Best Reasons Right Now for Investing in Microcaps:What is a penny stock?

A penny stock is any stock that is trading for $5.00 or less on any U.S stock exchange. The majority of penny stocks trade on the OTC market. Source – www.otcmarkets.com.

Penny Stocks are great for beginning traders or anyone who has less than 50,000 dollars to use for trading. Unlike blue chip stocks like GOOG and AAPL, penny stocks like TSAS have the potential to grow dramatically percentage wise because they are so low priced.

Penny stocks can generally be divided into 3 different categories. Penny stocks that trade on the higher exchange like the nasdaq, penny stocks that trade on a lower exchange but still fully report like OTCQB, and OTCQX, or penny stocks that don’t fully report at all like those on the OTCPink.

Due to the varied reporting practices of penny stocks there is much danger surrounding penny stocks that don’t trade on a higher exchange because they often go through “seasons of liquidity” and are constantly the targets of “pump and dumps”.

A Season of liquidity is the amount of time a penny stock maintains enough trading volume to allow traders to buy or sell with ease. The more liquid a penny stock is the easier it is for a trader to buy and sell shares of that particular penny stock company.

Seasons of liquidity can last as briefly as one trading day, or as long as 4 trading weeks and are the only profitable times to trade in and out of penny stocks.

From our experience  the average penny stock company that doesn’t trade on the exchange goes through an average of 4 seasons of liquidity per year, and those particular seasons of liquidity last on average of 3 trading days.

Note: Over long periods of time, micro-cap stocks outperform other equities. Micro-cap stocks improve a portfolio’s risk/return characteristics. Adding a deep value approach to a micro-cap strategy increases performance leading many perceived negatives such as illiquidity to actually benefit long-term investors.

1. Small Stocks Have Led the Market for More than a Decade

Why Trade penny stocks?

CNN.com says, “Small-cap dominance didn’t just begin with this bull market. Since the end of 1999, small-caps have delivered annualized gains of 3.9%, vs. losses of 0.5% for large stocks”

Penny stock trading remains one of the quickest ways to grow a trading account under 10,000 USD. Unlike blue chip stocks such as GOOG which costs more than $800 for a single share, the average penny stock will cost you less than $1.00 per share.

Not only can you buy more shares with a smaller account, but if the penny stock you bought does indeed rise the gains from the positive move are much higher. For example if we were to look at TSAS from 02/11/11 we would see that buying the stock early in the day around .04 and selling a few hours later near .50 would represent a realized gain of over 1,200%.

This type of value appreciation is impossible for a Blue Chip stock to replicate.

http://money.cnn.com/2010/08/04/pf/funds/small_cap_stocks.moneymag/index.htm

2. Small Stocks Can Deliver Amazing Long-Term Gains!

The top performer for the year once again was Small-Cap Focused Growth portfolio, with a gross return of 54.2% for the year ended Sept. 30.“Small-cap players are definitely shining again,” said Andy Kwon, a data analyst for Chicago-based Morningstar.

However, before you start trading penny stocks it is important to know the mentality of other traders that make up the penny stock market… which in short can be summed up as the “get rich quick” crowd.

The get rich quick crowd is typically made up of traders who watched the famous Wall Street movie and are now determined to spin a few hundred dollars to a few hundred thousand within a few weeks.

The most important thing to know about the “get rich crowd” is that they are the traders that create the huge pump, and also the traders that cause the huge dump. The get rich crowd is extremely emotional and will sell all at once at the BID if a penny stock starts to drop, and will buy all at once at the ASK when News is introduced.

Because of this it is important for us to “trade around” the get rich crowd.To “trade around” the get rich crowd you must assume two things.

  1. The get rich crowd will sell all at once as soon as a penny stock stops rising, so it’s important to sell before them. We accomplish this by selling “below expectations”. To sell below expectations we make sure to sell before a known “resistance level” is reached or as soon as we notice the penny stock stall to climb to new highs.
  2. The get rich crowd will buy all at once as soon as News is released so it’s important to buy before this information is released and to avoid buying right after this information is released. This is accomplished by buying penny stocks several days before an expected news event is scheduled to be released.

http://www.pionline.com/article/20121112/PRINTSUB/311129982

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