Why Its So Important To Have A Clear Understanding Of All The Different Types Of Penny Stocks'

                                

This is the most common problem with the term penny stock. The definition can be used in a very broad way. Investors in penny stocks and low single digit stocks should keep this in mind all the time. If we are talking about stocks that trade below 1 dollar. We are most likely referring to stocks that trade on the pink sheets or the over the counter bulletin board. Although their are stocks that trade on the nasdaq that trade under 1 dollar for the most part penny stocks that stocks below 1 dollar are going to trade on the pink sheets or the over the counter bulletin board. The quality of penny stocks trading on the pink sheets and the over the counter bulletin board is usually terrible the reason is usually because these stocks do not meet the rigid listing requirements to listed on the nasdaq or the new york stock exchange. As I  have said in a previous post the lower the price of a stock the higher the risk. The ideal penny stock or low single digit stock would be a company that has earnings growing sales on a annual basis the company has clearly established its products or services in the market place the company has been in business for a very long time say 20 years or longer What you  really want to look for in a penny stock or low single digit stock is a company that looks more like a 20 or 30 dollar stock trading on the new york stock exchange than like a 2 dollar stock. Getting back to penny stocks that trade on the pink sheets or the over the counter bulletin board. Many of the companies of these stocks are developmental stage companies they have limted sales  narrow product lines they usually  have a very high failure rate. They have not been in business very long in many cases less than 5 years in many cases. Their products or services have not been around for that long they clearly have not been well established in the market place. Would you rather invest your money in  the company of a 2 dollar stock that has  been selling their products in walgreens stores for over 20 years or in a 2 dollar stock of a  young unestablished company that is in the process of introducing their products to a walgreens purchasing manager. A product or service that has not withstood the test of time is almost always high risk.. One other thing to keep in mind when venturing into stocks trading on the pink shhets or the over the counter bulletin board. Because the companies of stocks trading on the pink sheets and  the over the counter bulletin board are so poorly regulated this is great territory for pump and dumpsters and fraudsters alike. On rare occasions theirs an exception to the rule when the stock of a company trading on the pink sheets or the over the counter bulliten board can be a good investment but very seldom.





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Why Its Important To Use Limit Orders When Buying Penny Stocks Or Low Single Digit Stocks That Have Very Low Volume

If you are considering buying shares in a  penny stocks or low single digit stock understand that penny stocks or low single digit stocks can have very low volume. Volume is the total amount of shares bought and sold on any given day. Very often penny stocks or low single digit stocks do not even trade everyday. The reason some of these companies are very small and unknown companies their not followed or covered by any major investment research firms theirs little news about these companies in the financial news because of their small size. Thats why its always a good idea to place limit orders on  stocks with little or no volume. Because the supply of shares available for sale  my be very small even a modest increase in the demand for the shares could easily push up the price of the stock by a considerable amount. When you place a market order you are willing to accept  the bid offered you have absolutely no control over the price you pay for your shares. But when you place a limit order on a stock you can specify the price you are willing to pay for your shares. Example suppose theirs a stock that you are considering buying it trades for 1 dollar a share so you place a limit order at 1 dollar your order for those shares will only be executed when the bid reaches 1 dollar this way you will know that you will pay no more than 1 dollar for your shares. Never place a market order for a stock with very low volume after the close because you have no idea what price the stock will open at a 50 cent stock could close at 50 cents and open at 75 cents. The spreads between the bid and the ask price can be hugh on stocks trading below 1 dollar. The bid is the price that you are buying a stock at the ask is the price the seller is selling their shares for. Penny stocks stocks under 1 dollar always have hugh spreads spread is the term used to define the difference between what the buyer is buying the stock for and what the seller is selling the stock for. The one disadvantage of a limit order is theirs no guarantee that your order will be executed at the price you have choosen. limit orders can take time to execute particularly if theirs little or no volume in the shares of the stock your trying to buy. To learn more about the differences between market and limit orders ask a stock broker.


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Why Its A good Idea To Avoid Most Stocks That Trade Below 1 Dollar

I really want to make this clear to everyone reading this blog. Always keep in mind the lower the price of the stock the higher the risk. I cannot stress this anymore. I know it sounds a little strange when you think of the term penny stock you think of a stock trading for ten cents twentyfive cents a share. But the broad definition of the term penny stock can include any stock trading below 5 dollars a share. I know that I have been referring to penny stocks as stocks trading below 1 dollar and low single digit stocks as stocks that trade between 1 dollar and 5 just to avoid any confusion. Most of the  low single digit stocks worth buying trade on nasdaq or the new york stock exchange and they trade above 1 dollar all stocks listed on the new york stock exchange must maintain a share price of at least 1 dollar otherwise they will be delisted Once in a very great while some sub 1 dollar stock will be a attractive investment even if the stock trades on the pink sheets or the over the counter bulletin board. But very seldom. Generally speaking the vast majority of attractive stocks trade over 1 dollar. Again. because I do not want to rule out all stocks trading below 1 dollar. I will say it again once in a very great while theirs an exception to the rule a stock that trades below 1 dollar could be an attractive investment even if it trades on the pink sheets or the over the counter bulletin board. I do not want to scare anyone  Its just that so many of these sub 1 dollar stocks are of such poor quality it takes a real pro to spot a junk stock from a diamond in the ruff. Many of these sub 1 dollar stocks that trade on the pink sheets or the over the counter bulletin board do not have financial statements that are up to date unlike most stocks trading on nasdaq or the new york stock exchange. These pink sheet stocks or the over the counter bulletin board  stocks can easily be manipulated. This is great territory for fraudsters pump and dumpsters unscrupulous stock promoters scam artists and the like these markets are not regulated like the nasdaq or the new york stock exchange.  Remember most of the quality sub 5 dollar stocks trade between 1 dollar and 5 on nasdaq or the new york stock exchange. So many of the really spectacular performers over the years have been stocks that traded between  1 dollar and 5 dollars a few examples apple yes apple traded at just 3.60 back in 1998 petsmart traded for just 2 dollars in 2000 and netflix traded for 4.00 in 2002 believe it or not today netflix is a 400 dollar stock apple was around 500 just a few months ago before the company split its stock five for one I think it was and petsmart trades for 72 or so. You will always find more great investment candidates between 1 dollar and 5 than under 1 dollar.




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Why So Many Of The Best Performing Penny Stocks And Low Single Digit Stocks Tend To Be Companies That Have A Product Or Service That Consumers Really Need.

Now here is something that I like to stress to investors of penny stocks and low single digit stocks. I always prefer investing in the stock of companies that sell a product or service that consumers really need food  companies companies in the healthcare sector come to mind first. A great example of another type of business that has products or services that are always in demand are companies in the pet supply business. Who would not take their cat or dog to the vet if it was sick who would not buy flea and tick medications if their dog or cat had fleas or ticks.What about companies that do car repairs.Cleaning product companies are another great example. A company in the Greeting card business another business would be the janitorial business. A company that makes filters for residential or commercial use another  Companies that make a product or service thats always in demand  have a more predictable earnings and sales cycle than companies that sell a product thats non essential


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Why Avoiding Penny Stocks Or Low Single Digit Stocks That Have A Long History Of Large Loses Is Such A Good Idea

Now here is one excellent piece of advice for investors  investing in penny stocks and low single digit stocks. Watch out for companies that have reported very large losses quarter after quarter this is usually a very bad sign.check out the news releasees on the company on yahoo finance  or google finance. If a company is losing huge amounts of money quarter after  quarter theirs bound to be major turmoil at the company. If the news release reads like this jmp reports a huge loss in forth quarter on sharply declining same store sales. jmp plans a major restructuring closing up to ten percent of their stores. jmp also plans on closing two distribution centers will take major charge in first quarter. jmp is out of compliance with listing requirements on the new york stock exchange. Chief financial officer resigns. jmp is out of compliance with loan covenants on revolving line of credit with  z bank. jmp attempting loan modifications to come back into compliance with loan covenant violations with z bank so far unsuccessful. z bank reduces loan available on revolving line of credit with jmp . from fifty million to twentyfive million dollars. jmp stock plunges from 2 dollars to 1 dollar  after Standard and poors downgrades jmp credit rating on ten years notes from B- to -C. jmp suspends dividend.. {jmp exploring strategic alternatives}This could mean the company is planning to file bankruptcy or selling the company if  it can find a buyer. Not a pretty picture As you can see from reading the news releases on the company their in very serious trouble to say the least. You can get the feeling that this company could go out of business or file bankruptcy. Always read the news releases on a company you plan on buying stock in before you buy the stock. Do not be alarmed if theirs some negative news releases on a stock most stocks trading below 5 dollars or under 1 dollar will have some negative news releases from time to time what your really looking for or really want to watch out for are signs that the company is in very serious trouble.


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Why Having A Diversfied Portfolio Of Penny Stocks Or Low Single Digit Stocks Is So Important

Now please heed this word of advice when investing in penny stocks and  low single digit stocks. Never put all of your money in a single stock never Regardless of how great the propects appear for the company that your investing in. This is the worst possible thing a investor in penny stocks or low single digit stocks could ever do. If you are placing all of your money in one stock and that stock goes to zero you will have zero money left. Its not necessary to put all of your money in a single stock theirs many stocks with good prospects The problem is you can never be sure what stock will perform very well and what stock will perform very poorly that why its so important to own a fairly good number of stocks  The best advice is to own at a minimum  20 stocks  Try not to have more than four stocks in the same sector. Diversification  is especially important when investing in penny stocks or low single digit stocks. Stocks trading below a dollar are almost always very risky. Stocks trading between 1 dollar and five dollars also can be very risky. The risk profile for penny stocks and low single digit stocks is much higher than the typical twenty or thirty dollar stock. Thats why. Diversification  is so very important when investing in penny stocks and low single digit stocks. By investing in different types of companies and different sectors you will not be placing all of your money on one horse. If one company or sector fails to perform well another my perform very well different companies and sectors move in different cycles whats hot today may not be hot tomorrow.



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Why Its Better To Favor A Penny Stocks Or Low Single Digit Stock That's In The Food Or Healthcare Industry.

Now here is a great suggestion for those considering purchasing shares in a penny stock or low single digit stock. Stocks in the food or healthcare sector I am not referring to biotech stocks by the way generally have a lower risk profile simply because the demand for what they are selling does not fluctuate as much as say the products  a building supply company sells. The demand for lumber drywall my decline sharply in bad economic times. The the demand for food and healthcare services will most likely increase year over year regardless of what the economic conditions are like..I prefer investing in a company that has a product or service thats going to be in real demand regardless of what the economic conditions are like. Thats why I favor food and healthcare over other sectors. The less a company is effected by economic conditions the better



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Why Its Best To Avoid Penny Stocks Or Low Single Digit Stocks That Have Emerged From Bankruptcy'

Generally speaking I Im not a big fan of companies that have emerged from a chapter 11 bankruptcy. they just do not seem to perform very well in most cases. I do not really know why. It could be that a lot of their best management people have left for greener pastures during the bankruptcy process. It could be that much damage has been done to the company during the bankruptcy process. The creditors generally care little about the business their goal is to maximize the  monetization of the companies best assets. The best most profitable parts of the company may be sold off to satisfy the creditors. Leaving the lesser quality divisions of the company to survive the bankruptcy process. Many companies in  bankruptcy  have filed  bankruptcy before for a second time. That tells me that many of these companies are not of the best quality. If a company has issued warrants when they exit bankruptcy. I would prefer buying those warrants rather than the shares of the company exiting bankruptcy. The warrants can be purchased for pennies on the dollar in some cases and if theirs a solid recovery in the performance  of the company the warrants could be worth 20 or 30 even 50 times what they were issued for when the company emerged from bankruptcy. You also put very little money at risk when you buy stock warrants in a company. Because generally speaking the warrants trade for pennies on the dollar in some cases. You can get a hugh payoff for a small investment by buying the warrants instead of the shares in the company.






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What You Should Do If You Buy Shares In Penny Stock Or Low Single Digit Stock That Files For Bankruptcy After you Purchase The Shares'

Now here is a situation that every investor in penny stocks or low single digits stocks will experience at some point in time. What if you buy shares in a company thats not in bankruptcy when you buy the shares. But the company ends up filing chapter 11 bankruptcy shortly after you buy the shares. In almost every case your best bet is to try and sell your shares into any kind of nice rally. Even shares in a company in  bankruptcy can have big moves in the price of their shares. Take advantage of any big rally to unload your shares. Never attempt to ride out the bankruptcy and hope that their will be something leftover for you when the company finally emerges from  bankruptcy usually theirs little or nothing leftover for the common stockholders at the end of the bankruptcy process. If you purchased your shares for say 1 dollar and they decline to 5 cents after the company anounces that they are filing for bankruptcy. Just watch the stock and see if theirs a nice rally if theirs a rally in the shares to say fifty cents take advantage of that rally to bail out of the stock. That way you have at least recovered 50% of your original investment in the shares. Do not think its a lost cause some companies can be in chapter 11 bankruptcy for many years. Their may be plenty of time for that rally to come any positive news about the company can cause the shares to rally even if the company is in chapter 11 bankruptcy.  Sometimes the shares may not rally sometimes the company may suspend trading of their shares while their in bankruptcy. Sometimes theirs just no market for the stock. In that case it really does not make a whole lot of difference because your shares ae most likely worth very little anyway. You might want to just wait and see if their will be any new shares issued to you once the bankruptcy process is complete.






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Why You Should Never Invest In A Penny Stock Or Low Single Digit Stock Thats In Chapter 11 Bankruptcy'

Now here is another no brainer. In the vast majority of cases companies that are in chapter 11 bankruptcy are a bad investment. Most of the time theirs no equity for the common stock shareholders when and if the company emerges from bankruptcy. Their are some cases when the common stock shareholders receive a token  interest in the company when it emerges from bankruptcy. Maybe 3% of the new shares issued. In a very small number of cases the shareholders receive decent number  of the new shares issueed  Generally speaking when a company comes out of bankruptcy the old shares are canceled and new shares issued. Everyone that owns shares in the company before the bankruptcy is finalized will generally have their shares canceled. That means the shares are worthless. The common stock shareholders are at the end of the line all the other parties in the  bankruptcy are legally entitled to receive equity in the company emerging from bankruptcy ahead of the common stock shareholders. Secured creditors are ahead of unsecured creditors and so on. Thats why its a bad idea to get into a company thats involved in a chapter 11  bankruptcy. And if the chapter 11  bankruptcy is converted into a chapter 7  bankruptcy which is a very common occurrence than theirs almost no chance that the common stock shareholders will receive any compensation. In a chaper 7  bankruptcy the company will not stay intact as a company instead all of the assets of the company different divisions will be sold off to pay off creditors or if the company shuts down land inventory trademarks and so forth  will be sold  to pay off creditors. Best advice stay away from companies trading in chapter 11 bankruptcy












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Why I Always Recommend Investors Always Avoid Penny Stocks Or Low Single Stocks That Are In The Financial Services Sector'

I would like to make this clear. I am not a fan of financial services stocks. I have a real problem with these type of companies. All they do is move money around its really that simple. They do not create anything of value theirs no real product or service that they provide. Consumers need a bank or other financial company to provide checking accounts for paying their bills by check for example. Or they may need a mortgage to buy a home. The bank is just a middle man for the money changing hands  between the buyer and seller. Banks make their profit by loaning money out at a higher rate than what they pay on their deposits. Businesses need a bank of other financial services company to provide a line of credit or they may need a bank to deposit funds in various types of accounts payroll accounts and so forth. Another reason that I dislike financial services stocks is this when a bank goes under the shareholders are instantly wiped out once the federal deposit insurance corporration takes over the bank the short name for this federal agency which is responsible for the orderly process of selling the banks assets paying off insured depositors  and so forth is the FDIC. When this happens you will lose 100% of your investment. Financial services stocks have a terrible record a record number of banks failed back in the 1980's. What we  witnessed in the panic of 2008 and 2009 when some of the countries largest financial institutions failed or were prevented from failing because the governemnts TARP program saved them. Their were many publicly traded rmortgage companies that went under that specialized in subprime mortgages. Financial stocks have one of the highest risk profiles of any class of stocks   I would much rather invest my money in a company that makes a product or provides a neccessary service.






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Why I Recommend That Investors Investing In Penny Stocks Or Low Single Digit Stocks Avoid Gold Silver Or Other Types Of Mining Companies'

Now I know that lot of penny stock investors and investors in low single digit stocks wiil be tempted to buy a penny junior gold mining stock at some time or another. The problem with these type of companies is they have a much higher failure rate than  penny stocks or low single digit stocks that are in a business area outside the mining sector. The penny stock mining business is probably one of the most speculative highest risk industries out their why bother with these type of stocks when their some many other penny stocks and low single digit stocks out their that have a much lower risk profile and have far better prospects and potential than penny gold mining companies. In many cases companies in the penny junior gold mining sector are ideal plays for pump and dump scammers.

The link below is a you tube video about a pump and dump scam the company is involved in the penny junior gold mining business.



http://www.youtube.com/watch?v=e8M7Q9T4NfI









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Why Its So Important To Not Buy All The Shares In A Penny Stock Or Low Single Digit Stock all At Once'

Now here is another no brainer. If you decide to purchase shares in a penny stock or low single digit stock never buy all the shares all at once. Its impossible to know the exact bottom for a stock. Penny stocks and low single digit stocks are a lot more  more volatile then the typical higher price stocks. Use this volatility to your advanatage. The price that you are paying for a penny stock or low single digit stock will most likely not be the bottom for the stock. The shares will most likely go lower before they go higher. Most penny stocks and low single digit stocks that are trading close to their fiftytwo week lows will almost certainly go lower before they go higher. I would recommend investors purchase penny stocks or low single digit stocks in positions of three or four increments that way everytime the stock declines a little further you can add to your position in the stock at a lower price. You will be averaging out the price you pay for the shares. Instead of trying to guess when to buy all your shares at the right price. In other words if the share are a good value at 2 dollars they are an even better value at just 1 dollar thats assuming the companies performance is no different than it was when the stock traded at 2 dollars

The only time that I would avoid adding to your position in a penny stocks or low single digit stock at a lower price would be if theirs a real deterioration  in the companies fundamentals. If theirs a very large drop in the price of the shares thats accompanied by a serious deterioration  in the companies financials maybe a large loss or some other very serious issue. Than I would most likely take a pass on buying more shares of the stock. As far as the shares that you already own you can just retain those shares.


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What Is A Pump And Dump And How to Avoid Being A Victim Of a Pump And Dump Scam'

This scam has been around for a very long time. The basics of a pump and dump scam are such.
I am sure if you have been active in looking up info on penny stocks online you have come across websites on the web that will email you their next big penny stock pick free of charge of of course.

They may make wild claims about a little known oil company in the hills of appalachia or somewhere else. They say this little company will soon be producing millions of barrels of oil better get into the stock while theirs still time. It trades for only 20 cents a share. The stock could go to 2 dollars a share in the next six months.

Another example might be theirs a fuel additive being developed by this company that will enable motorists to double their gas millage by using this additive. Stocks trading for 15 cents could be at 1 dollar in a few months  Get the idea

Now this is how a pump and dump works. The scamers email thousands or millions of persons about the great prospects ahead for this company. Send out faxes to thousands or millions of potential investors and maybe a few dozen or maybe even hundreds of unsuspecting would be investors will buy into this scam by purchasing shares of stock in one of these companies. Turns out that the oil company in  appalachia or somewhere else does exist but the wells been dry for years. And that company that was supposed to be developing that fuel additive to double gas millage turns out it never got out of the lab turns out their never was such a product in development at the company at all. The company was just a shell company used by scam artists to get unsuspecting investors into the stock.

The scam artists carefully found a company where they could easily manulate the price of the stock to their advanage. usually a stock trading on the pink sheets or the over the counter bulletin board. Its most likely theirs the need for collusion with the management of the company to pull off the scam.

So the scam artists buy shares in these stocks ahead of everyone else than start to  make wild and almost unbelievable claims about the future prospects for the companies to help drive the price of the stock upword sending mass emails out to unspecting investors sending out mass faxes anyway they can have the maximum possible impact on the stock price. Thinly traded shares in a very small company can increase by huge amounts if theirs just a modest increase in the demand for the shares. Once the scam becomes known the stock collapses leaving most of the unspecting investor with shares worth little or nothing

The scam artists have long bailed out of the stock once the music stops


A word of advice stay away from websites which make unrealistic claims about a stock and promise to email you their next big winner for free .


The the link  below is a video about a pump and dump scam.




http://www.youtube.com/watch?v=e8M7Q9T4NfI









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Why A Very Low Price To Sales Ratio Could Be The Most Important Factor When Investing In Penny Stocks Or Low Single Digit Stocks'

Once again I will attempt to make this as simple as possible. A low price to sales ratio is a simple way to determine if a company is very undervalued. Theirs a lot of reasons why a stock might trade at a low price say 1 dollar or 4 dollars a share. But how does one really know if the stock is a bargain if it trades below 5 dollars or below 1 dollar their has to be a way to really measure the value of the company. The price to sales ratio is the key because its so simple anyone even those with little financial knowledge can easily determine this valuation. I will give a simple example of a stock with a low price to sales ratio. Suppose theirs a stock that does 200 million dollars in annual sales now the market cap of the company is only 10 million dollars annually. This means that the value of all of the shares trading in the market are worth only 10 million dollars. In other words the value that the market is placing on the company is just 10 million dollars. Get the idea sort of.

Here is a simple breakdown of this measurement

Their are a total of  2 million shares issued and  outstanding thats all the shares that are held by shareholders.

The price of the shares trading in the market is 5 dollars

So 2 million shares valued at 5 dollars a piece = 10 million dollars.

The company does 200 million dollars in annual sales but the value of the  business is just 10 million dollars. Thats what I mean when I say a stock with a very low price to sales ratio could be a great bargain because the value that  the market is placing on the business is so much less than the annual sales of the company.

Find a low single digit stock or a penny stock in a  halfway decent company with a very low price to sales ratio and you will have the odds heavily in your favor compared to low single digit stocks and penny stocks that lack this so very important valuation factor.

In order to have a high likelihood of making enormous profits in a low single digit stock or penny stock a low price to sales ratio is a essential element.


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Why Investing in Penny Stocks Or Low Single Digit Stocks Of A Larger More Diversfied Company Is Usually A Safer Bet'

Now I talked a little about this in a different post. The real problem with a lot of very small companies trading below 5 dollars or under 1 dollar is simply the fact that  a lack of diverscation is a real problem. We could be talking about a single product that will make or break the company based on its performance. Or we could be talking about a company that gets most of their business from one customer say walmart is the largest customer for a company that makes a soda product maybe 50% of their annual sales are to walmart. thats a high risk to the company if for some reason walmart decides to not buy their product anymore. Larger more diverse companies are less likely to be so heavily dependent on a single customer for their product or service  By favoring somewhat larger more diverse companies the risk is going to be lowered  because their success or lack of success might not depend so heavily on the whims of a walmart purchasing manager.

Finding larger companies trading below 5 dollars or below 1 dollar will require more effort because most sub 5 dollar stocks and sub 1 dollar stocks tend to be very small companies. Its worth the extra effort  because the risk level is generally  lower for companies that are larger in size. We are talking about companies doing maybe around 100 million dollars in annual sales or more. You are more likely to find low single digit stocks and penny stocks trading on the new york stock exchange and the nasdaq that do over 100 million dollars in annual sales  than on the over the counter bulletin board or the  pink sheets.



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