Penny Stocks For Dummies. Peter Leeds

      Imagine standing before a huge group of people who don’t like live music. They’ve had bad experiences at concerts before, whether because the speakers were too loud, the venue had poor acoustics, or they just picked the wrong band.

      But you know that some live music can be great. You know that these people will love concerts if they just attend the right ones. Now imagine that it’s your job to convince them to give concerts another try. Substitute the word concert with penny stocks, and you get a sense of what I face when trying to persuade people that trading in penny stocks can be a positive investment experience.

      Many people have invested in penny stocks at some point. Almost all of them have lost money on those shares, and they’ve let their negative experiences with low-quality penny stocks scare them away. However, to conclude that penny stocks are foolish investments means that people aren’t taking responsibility for the mistakes they’ve made. They have painted the entire investment class with one brush just because of their singular experience, but that’s like assuming all live concerts are bad just because you picked a bad seat at the only show you ever attended.

      My first task when speaking about penny stocks is to explain that there is a difference between low- and high-quality penny stocks. After I address the negative connotations surrounding the topic and explain how easy it is to avoid the pitfalls and junk, people always become more interested.

      Low-quality penny stocks traded in the wrong ways are foolish investments. High-quality companies trading for pennies at the right time, in my opinion, are far and away the best investment choice available.

      The good news is that everything you need to know to trade penny stocks successfully is included in this book. I have no doubt that you will become a phenomenal investor in low-priced shares if you follow the suggestions discussed in these pages.

      However, my biggest hope is that you go a step further and help protect your friends and family from getting burned by the wrong kinds of penny stocks. They’ll never know that you saved them thousands. They’ll never thank you. But isn’t that the best kind of reward?

      ❯❯ Large cap companies, also known as blue-chip stocks: Any company whose shares value the business at $5 billion or more are known as large capitalization companies, or large caps for short. Some investors use the value of $10 billion as criterion to apply the large cap moniker, while others use different parameters.

      Shares of the very biggest companies, which are valued at billions of dollars, are known as blue-chip stocks. Many of these companies are household names, such as IBM, McDonald’s, Disney, and Exxon, and trade on the New York Stock Exchange (NYSE) or on other major stock markets (see Chapter 3 for details on the various markets).

      ❯❯ Mid cap companies: The term mid cap is short for middle capitalization, but you’ll probably never hear the long version of the name. These companies are typically valued between $500 million and $5 billion, but again this depends on who is providing the definition.

      ❯❯ Small cap corporations: These companies have total values of between $50 million and $500 million.

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      Micro caps, also known as penny stocks: Any company whose total value is less than $50 million is considered a micro cap. Because penny stocks typically represent smaller, growing corporations, they’re often in the micro cap category. This category of stocks reacts to situations that are unique and material to it, even when the same events would have little impact on much larger companies.

      ❯❯ Starting from lower prices: The lower the price of the shares, the greater any moves in them will be, proportionately. If a penny stock increases from 20¢ to 30¢, that’s a 50 percent gain. The same ten-cent jump in a stock priced at ten dollars per share only represents an increase of 1 percent.

      ❯❯ Earlier phase of corporate life cycle: When a company is new, its potential is wide open. It may end up at point A or point Z, or anywhere in between. Any event or shift in the mind-set of investors can result in major changes in expectations for the company’s future. With any early shift in that anticipation comes significant adjustments to what investors are expecting from it, and those adjustments directly impact the share price.

      ❯❯ Thinly traded: As penny stocks are generally traded by fewer people, and in smaller amounts, a large buy or sell order can move the price significantly. If there is a limited supply of shares for sale at lower prices, any significant buying demand may push the price up into higher prices.

      ❯❯ Changes in speculation and potential: The prices of penny stock shares have a much greater basis in speculation and potential. In other words, what a company theoretically “could” do has a lot more value when it is just getting started or is in the early phase of its life cycle. Unlike quarterly financial reports, or gradually improving client lists, for example, massive shifts in speculation can occur quickly and have a dramatic impact on the potential for the underlying company and its share price.

      ❯❯ Fewer, more meaningful events: Newer and smaller companies typically experience fewer major events. When they do have something to report, such as a new client win or a patent approval, that event will have a proportionately greater impact on the company.