If you want to be successful in investing then you need to live by a set of rules. Penny stock investing is no different. In fact, because of the volatility of penny stocks it is probably even more important to trade by some very specific rules. With that in mind here are a few tips to help in your penny stock investing.

Tip #1

Always trade stocks with good volume. This is especially true in the penny stock trading world. Since most penny stock traders trade thousands of shares it is important to trade in stocks that have a high enough daily volume to be able to absorb you moving in or out of a position. In thinly traded stocks you could move the stock price by up to 5% against you if you had to get out. Low volume will work against you.

Tip #2

Don’t follow too many penny stocks. One of the mistakes of traders is that their attention is too divided. You do not need to follow 50 or 100 or 200 stocks to be successful in penny stock investing. In fact I would say failure is proportionate to the amount of stocks you are trying to follow. I would recommend putting together a watch list of 10 or 20 companies and look at their charts every day. If you try to track too many stocks you will miss big moves when they occur. Following a smaller watch list allows you to get to know your stocks. You are aware of earnings dates and some fundamentals. You begin to get a feel for its trading pattern.

Tip #3

Don’t be too diversified. The point of trading penny stocks is to be able to take advantage of the large swings. If you are too diversified (i.e. holding too many positions) you will water down your profit potential. I would recommend not holding more than 3 or 4 positions. Does this create more risk? Of course it does. But you need to manage risk by your trading rules and not through diversification.

Tip #4

Have specific trading rules in place. As I mentioned earlier no one will succeed in penny stock investing apart from a disciplined set of trading rules. Before you begin trading you need to have a defined set of entry strategies and exit strategies. then you must stick to them like glue. These rules are your lifeline in trading. Without them you will go under.

So where do penny stock investments fall in the order of safety? No one is trying to be deceptive. Penny stock investments can be risky. However, if you are going to trade in penny stocks then you need to realize that they are not long term holds. I would never recommend buying a penny stock and holding it for five years. The fundamentals of these stocks are so poor that it is difficult to even make an informed decision about the prospects of the company. I would have no idea where they would be in five years. But I may be able to predict their near term trading pattern over the next two weeks.

Penny stock investments are really not investments at all; they are trading vehicles. The point in trade penny stocks is to move in and out of them to take advantage of the large swings that they often present us with.

If you put in place a very disciplined and strict trading program you can limit much of the risk involved in penny stock trading. If you narrow down the stocks that you will trade to those that provide you the best liquidity and near term visibility of price movement you will go a long way to limiting your risk. Trade penny stocks who have had recent good news or who have already reported earnings. This way there is less of a likelihood of a downside surprise.

Once you have narrowed your trading list down then you need to trade on the basis of some very defined entry strategies and exit strategies. Know why you will get into a stock and why you will get out. I do not recommend that you ever make those decisions based on fundamental analysis. You are a trader and should make your trading decisions on the basis of technical analysis.

Determine what triggers will get you into a position and which trading signals will get you out. The same principles of technical analysis apply to all stocks regardless of their price. Become a student of technical analysis and apply what you learn to your trading of penny stock investments.

It is humorous that many in the investment community consider themselves successful of they return in the neighborhood of 10% on their account each year.  Why is this humorous?  Because a 10% gain is a good day for some penny stocks, not a year.  Penny stock gains can easily run in the neighborhood of 10%, 20% or even 50% in a day.  A five percent move is just an average run of the mill move.  Why is this the case?  It is because penny stocks have such a low cost per share.

Penny stocks usually refer to any stock trading under $5 per share.  Since they are priced so low every move in the stock is magnified.  A 20 cent move in a $20 stock is only a 1% move, however, the same move in a $2 stock is a 10% move.  Ten thousand dollars invested in the $20 stock would leave you with $10,100 where the same money invested in the penny stock would give you $11,000.  If you think that this is a large move, think again.  In the world of penny stock trading, penny stock gains of 10% are small.  Let’s take a look at a couple of examples.

Dendreon (DNDN) is a biotech stock.  On March 9, 2009 DNDN was trading at $2.64.   On April 27, 2009 it closed the day at $21.55.  That is more than a 900% return in 1 1/2 months.  This is the power of penny stock gains.  Today the stock trades over $33 per share.  This is what can happen when there is great news on a biotech penny stock.

Human Genome Sciences (HGSI) is also a biotech stock.  On March 11, 2009 it closed at .48 cents per share.  On July 28, 2009 it closed at $14.63.  Today it closed at more than $30.  That is more than a 6300% return in less than one year.  To give you better understanding $10,000 invested in HGSI nearly one year ago would have produced $625,000 today.  So when I say that penny stock gains can be staggering, this should give credence to it.  You may want to consider doing some penny stock trading of your own.

Trade penny stocks with good volume.  There are penny stocks that do not trade many shares on a daily basis.  This can cause a problem for the active trader.  It makes it more difficult to get into a position or to get out of a position without effecting the price.  Since penny stocks are cheaper than the average stock penny stock traders have a tendency to buy more shares.   If you are holding 5000 shares of a company that only trades 15,000 shares on an average day, you will move the market against you if you need to exit your position.  Try to trade stocks with at least 500,000 average volume.  The higher the volume the better.

Stay away from scheduled news events.  More often than not the news for penny stocks is not too great.  Although there are mammoth gains to be had if you guess in the right direction there are tremendous losses to be incurred if you are wrong.  As a result, I would not hold a position going into their earnings announcement.  The risk is too great.  There are many other opportunities to take advantage of during the time between earnings announcements.  The only exception to this may be in the biotech arena.  If a penny stock company is waiting on drug approval you may want to take a chance since this can result in an overnight double or more.  I have seen stocks open the next day up 700% on such announcements.  However, keep in mind that if the announcement is not favorable then the stock is likely to get cut in half or worse.

Another key for the penny stock trader is to buy stocks that have pulled back after good news.  Often you are not in a penny stock at the time it makes a big move.  But if you will wait you will often get a second chance.  If there was a big move then many traders will begin to take profits.  This will push the stock lower.  As it continues to fall others will want to at least get something out of the big move so they will sell as well.  Many times this will bring the stock very near to wear it began the move in the first place.  This provides you with a second chance to enter a trade for the next leg up.

If you can put these three keys to work in your daily trading it will go a long way toward making you a more effective penny stock trader.

If you do not normally trade penny stocks I would recommend that you take a small portion of your account and dedicate it to penny stock trades. You may want to consider using about 10% of your account for this purpose. As you become more adept at trading penny stocks you can increase the amount you dedicate to this type of trading.

Penny stocks have been know to make 20% – 100% moves with a single trading day. Higher prices stocks that you may be trading do not have the ability to make similar moves. You can look at makying penny stock trades as sort of a diversification for your account. This portion of your account would obviously be the riskier strategy.

Depending on the amount of money that you will be using will determine how many different positions that you may trade at the same time. Never include more than three penny stock positions. There is no need to diversify further since this is ony involving 10% – 15% of your account. In fact, if you wish you can carry only one position at a time.

Since penny stock trading can be volatile and risky at times know your exit strategy for each of you penny stock trades. If your exit strategy has been triggered then exit the stock and wait for a new opportunity to enter another trade.

If used properly, penny stock trades can be used to effectively increase your trading profits.

There’s no question about it — penny stocks can bring home some of the biggest gains in the investment world. But those tiny companies can also bring along quite a bit of risk. In fact, one of the biggest questions we get here at Penny Sleuth HQ is: “Can you tell me if XYZ Corp. is legit?” And while we can’t give out personalized investment advice, we can give you the tools to determine whether you’re investing in a business with serious profit potential or a scamster’s shell game…

Here’s how to know if your next penny stock play is legit…

For many investors, the idea that a stock could be representing itself incorrectly is unthinkable. After all, we’ve got the SEC, the exchanges — like NYSE and NASDAQ — and independent auditors taking a look at every filing that a company puts out to shareholders. But in the world of microcap stocks, many of those same protections just aren’t there.

While Securities and Exchange Commission (SEC) was created, in part, to protect investors from nefarious activities in the stock market, the countless securities scandals of the last couple of years have shown us that the agency simply doesn’t have the resources to make sure that the smallest companies are reporting accurately. And in fact, many of the smallest microcap stocks are completely exempt from reporting to the SEC.

Serious listing requirements (almost always) ensure that stocks trading on major exchanges are legitimate businesses, but for stocks that trade OTC or on the Pink Sheets, the requirements to get shares trading are slim to none.

And while most investors think of audited financials as a safeguard that keeps a company’s financials accurate, many companies also aren’t required to get their books audited because of their size.

Even if you’re thinking about investing in a Pink Sheets stock that’s exempt from registering with the SEC and getting an audit performed, you might still be looking at a perfectly good penny stock investment…but you have to do your homework.

Verify the Business

The first step to determining whether a penny stock is legitimate is to verify that the business exists and does what you think it does.

You can start off by entering the stock’s ticker on a major financial site — like Google Finance — and checking out the description of the company. Those descriptions come from SEC filings, so you can generally trust what they say since thanks to the Sarbanes-Oxley Act, it’s a felony for management to lie on company filings.

Also, log onto the SEC’s website and look for company filings to get the full look at a company’s operations. And don’t forget to look at its ticker…an “E” at the end means that the company is delinquent in providing its regulatory filings — a very big red flag.

For companies small enough to not file with the SEC, ask your broker for a copy of the company’s “Rule 15c2-11 file.” In it, you’ll find a slew of information that the company was required to provide to prove their exempt status.

Check the Auditor

When you’re reading a company’s financials on the SEC website, look for the audit opinion (generally near the end of a 10-K annual report filing). It’s a statement from the independent auditors that explains the steps an auditor took to verify a company’s financials as well as whether the financials are accurate in their opinion.

Checking who the auditor is makes a big difference too. Bernie Madoff’s “independent” auditor was neither — he trusted Madoff too, blindly signing off on the scamster’s financials and losing millions of his own in the process. Checking into the accountant’s CPA firm would have showed that it was a tiny storefront with only one CPA and without the manpower to audit a multi-billion dollar financial firm.

Getting audited by one of the “big four” accounting firms — PricewaterhouseCoopers, Deloitte, KPMG, and Ernst & Young — is generally the domain of big blue chips that can afford to have prestigious accounting firms handle the audit, so don’t stress if the auditor’s name doesn’t look familiar. Take the time to research who the auditor is, though, and whether they’re qualified to handle a company audit. A quick Google search should solve that…

Give Them a Call

Hard-to-find contact information is another red flag that should be watched out for. Since most companies are constantly on the lookout for new business, their sales team should at least be easily accessible. If you have concerns about whether or not the company is legit, go ahead and call the phone number on their website. If you can’t find a number or address, check back on the SEC website — companies have to include their corporate contact information on the cover of all 10-K and 10-Q filings.

New technology has also made it much easier to verify a business’s contact information. Just type in a company’s address into Google Maps, and select “Street View,” and you can actually see the building where its offices are located. If the offices for a publicly traded stock are showing up as someone’s home or a mailbox rental store, be very wary of going forward.

Follow the Money

If you really want to know about a company, you have to follow the money — its customers…

For any company that markets its products to consumers, a quick web search should give you an idea of how well — or poorly — the company is treating the people who use its services. Reading customer experiences will also give you an idea of whether or not people are jibing with the company’s offerings.

Googling your way to customer experiences isn’t always an option, especially when a company caters to enterprise or government clients. In these cases, where more money is generally involved, lawsuits are more likely as a result of business disputes. Check an online legal database — like the U.S. PACER System — to see whether your potential microcap investment is being sued by customers.

Check for Promotions

It’s possible for a company to be legitimate while the news that “independent parties” are touting isn’t. These so called “stock promoters” are publishing faux research reports and stock recommendations in hopes that investors will catch on to the penny stocks they’re selling. They do this through websites and newsletters that seem legitimate on the surface, but are essentially nothing more than schemes to get people to buy these stocks.

While we’ve never accepted money to write about any stock here at the Sleuth, some in the industry do… And believe it or not, it’s completely legal as far as the SEC is concerned.

There are a few ways that you can tell whether a stock’s being pumped by a promoter. For starters, go to the horse’s mouth — check out StockPromoters.com — the site features a listing of which stocks are paying for which promoters, as well as what the promoters are getting in return.

Promoters aren’t ashamed about what they do — they want companies to know how good they are at their jobs…that’s why they’re so easy to spot.

More Homework, More Profits

To be sure, doing the research is tough and time consuming. But it’s also the only way to be completely sure that the next penny stock play you’re putting your hard earned money on the line for is legit. Small stocks have some of the greatest gain potential out there — and if you know what to look for, you can make sure that you don’t get burned in the process of pursuing profits.

By David Baines

It started last Saturday with a teaser. A penny stock promotion service called BoldStocks.com sent me an e-mail saying it was going to recommend a stock on Monday. The stock’s identity would remain a secret until then, but “Mr. Bold” offered a hint: “It could not be more timely.”

On Sunday morning, there was another hint: “Don’t leave home without it.” And in the evening, yet another: “More than 10 years in business with stable management and key researchers.”

On Monday, the mystery company was revealed: Skinvisible Inc., a Las Vegas-based company that has developed a hand sanitizer to prevent the spread of the H1N1 virus.

Boldstocks.com is one of several Internet tout services run by Pentony LLC of Frisco, Tex. The disclaimer revealed that Skinvisible had paid Pentony 500,000 restricted shares to stage this little game.

At the close of business on Monday, “Mr. Bold” proudly announced that Skinvisible, which trades on the OTC Bulletin Board in the United States, had closed up seven per cent on double the usual trading volume. But keep in mind, this is a penny dreadful where percentages can be very misleading. The absolute increase was one cent, to a grand total of 15 cents.

Skinvisible claims its “DermSafe chlorhexidine hand sanitizer has been tested against many bacteria and viruses. It has been proven to kill / inactivate a number of influenza A viruses; including a strain of H1N1, the swine flu virus.”

But there are lots of effective hand sanitizers already on the market (including plain old soap). The difference is that Skinvisible claims it has a patented ingredient that fights germs up to four hours after washing, but this has not been proven.

In the United States, the product requires Federal Drug Administration approval before it can claim to combat swine flu. It has not received that approval. In Canada, the product has been approved by Health Canada for personal use only.

A few days ago, the company announced it has sold licensing rights to a distributor for all of Singapore, Malaysia, Thailand, Indonesia and the Philippines. This might be encouraging, but for two things: Payment terms were not disclosed, and the announcement was made by Terry Howlett, the company’s president and CEO.

Howlett is well known to me as a former Howe Street denizen who learned very early in his career that a promoter, like a virus, has to adapt quickly to its environment to survive.

Howlett’s first Howe Street adventure, Presley Laboratories Inc., was listed on the Vancouver Stock Exchange in April 1987.

It began as a multi-level marketer of “Lady Love” cosmetics and hair products, but soon switched gears and announced it would acquire Modern Electronics Inc., which had developed a security system for buildings.

By June that year, the company was referring to Modern as its “wholly owned subsidiary” and projecting sales of $500,000 the first year and $1 million the second. But several months later, Howlett announced the “proposed” acquisition had fallen through. More premature exclamations would follow.

In September 1988, Howlett announced Presley would market a telephone touch-tone order entry system developed by a person named Jerry Hodge of Irving, Tex. (A dozen years later, Hodge would pop up again in Skinvisible.)

In February 1989, Howlett announced a letter of intent to sell 10 systems worth $665,000 to a Calgary company over the next six months. Projected sales over the next year were $3.3 million.

But within several months, he announced this deal had also fallen through. Instead, the company would sell marketing and software rights to the ordering system to a Vancouver company for $5.5 million. This also fell apart.

In January 1990, Howe Street bon vivant Harry Moll — who was building a VSE mini-conglomerate called Pineridge Capital Group — acquired a controlling interest in Presley from Howlett.

Howlett — who remained as chairman — kept churning out good news. He said the company’s Canadian dealer would buy $6 million worth of product over the next 12 months. And that was just Canada. Marketing in the U.S. would start in September 1990.

As always, the proof was in the financial statements. Total sales for the two years ending July 1991 — when Howlett was promising millions of dollars in revenues — were only $98,000, and losses were a whopping $1.3 million.

In 1992, Moll’s mini-conglomerate collapsed in scandal. It was revealed he had sold hundreds of thousands of dollars worth of shares in Presley and several other Moll-controlled companies to the Wolverhampton municipal pension fund in England. That raised the question, what was a supposedly sober fund like this doing in flaky stocks like these?

The fund manager was later fired, raising suggestions that he had been taking bribes. Moll denied he had provided any special incentives: “Just lunch, and a cocktail or two,” he said.

Then-B.C. premier Glen Clark was sufficiently alarmed by Moll’s antics that he commissioned a government inquiry into regulation of the exchange. VSE officials, meanwhile, blackballed Moll from any association with its listed companies.

In the wake of this scandal, Moll returned control of Presley — which by this time had been renamed Voice-It Technologies Inc. — to Howlett.

Without missing a beat, Howlett announced the touch-tone ordering system would be used in a venture called Talking Flowers, which enabled people to send flowers and talking messages to their loved ones. It was also a flop.

Howlett made more breath-taking announcements that never amounted to anything. By June 1997, he resigned as director and president. The company limped along until March 1999, when it was suspended for failure to file financial statements, then delisted for failing to pay its listing fees.

In 2000, Howlett reunited with his old pal Hodge and his buddy Moll — even though he had been thoroughly disgraced by now — and took Skinvisible public on the bulletin board.

In his usual style, Howlett has been spewing a steady stream of boosterish announcements, but they haven’t amounted to much. During the six months ending June 30, the company reported $146,976 US in sales while racking up another $879,621 in losses, raising its cumulative losses to $17.8 million. Total assets were only $195,938 against $746,484 in liabilities, which means the company is basically insolvent.

Howlett said during a brief telephone interview this week that he now lives in Las Vegas, where the company’s head office is located. He said Moll and Hodge are no longer involved.

I asked what he thought of the BoldStocks.com hype. He said he had nothing to do with it, which is strange considering that Pentony says the company paid 500,000 shares for the service.

Asked what he thinks of that style of promotion, he replied, “I have no opinion on it.”

That was an astute answer. I mean, who wants to spoil their own party?

Link to Original Article: http://www.vancouversun.com/life/Bold+serves+stock/2196188/story.html

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