Peter Leeds

Cheat Sheet / Updated 02-25-2022

Many excellent companies trade as penny stocks, and investing in those companies as they “grow up” to become bigger stocks can be extremely lucrative. Unfortunately, penny stocks have been given a bad name among the investment community, and in some cases, that negative reputation is well deserved. But after you discover a few tactics for sidestepping the easily avoidable pitfalls in penny stocks, you can uncover incredible companies that will turn a small investment into a significant reward.

Article / Updated 07-01-2021

A penny stock is a small company's stock that trades via over-the-counter (OTC) transactions for less than $5 per share. A few consistent traits often indicate that a penny stock has a bright future ahead. You can use these hints to assess a stock quickly, and they can serve as valuable analysis tools for investments of any size. Watch the money flows Money flows into and out of stocks, and that impacts share prices. When dollars are flowing from the sidelines into shares, the net result is generally an increase in the price of the stock. The same holds true in reverse, too: money flowing out of shares can bring the stock price down. You can watch the money flows by using some readily available technical analysis indicators, such as money flow and on balance volume (OBV). Both are available from free analysis websites, including bigcharts.com. When there is an upswing in OBV, or money flows are strongly positive, but there has not yet been any increase in the share price of the underlying penny stock, share prices are likely to move higher. Money flows usually coincide with share price moves, but sometimes they occur before the penny stock reacts. Timing is everything! Investing during a window of time when money is moving into the shares, but before the stock has reacted positively, can be a very profitable strategy. Spikes in trading volume Generally, trading volume spikes when a company has good news or experiences a positive event. Share prices generally increase soon after such events and will continue to move higher until the buying demand subsides, which could be within a day or perhaps many weeks later. When the daily trading volume increases to at least double the average, while the price of the penny stock moves higher, it can be an excellent time to invest. This is often the beginning of a nice upward price trend. However, be wary of volume increases that come with dropping prices. This could represent shareholders selling en masse, perhaps due to negative news or a scandal surrounding the company. Let spikes in trading volume indicate potential upcoming price moves, but always beware of dropping share values that come with the increased trading activity. Focus on increased trading volume only when it comes with price strength. See what management has done with previous companies Here's one instance where being stuck in the past is a good thing: the best indicator of future results is past performance. Said another way, people will generally continue to do what they’ve always done. This is just as true with company management among penny stocks as with anything else. Before investing in any penny stock, take a look at what the key personnel running a company have done previously. A CEO who multiplied the value of several companies they were involved with should get a lot more credit than one who bankrupted the last few. Their name, product, or industry keeps coming up Pay attention to the social buzz surrounding any product or service. When you hear about a new donut shop for the third time in a week, or you see a product name via five different sources over the course of a month, look into the underlying company. Hype can often drive share prices dramatically higher in the short term. Bank on increasing market share When a company demonstrates an increase in market share, it implies higher sales, greater product acceptance among customers, and pressure for their competition. The best-case scenario is steady and predictable market share gains, as opposed to volatile and unpredictable changes from one period to the next. You can find out a company’s market share by calling its investor relations contact and asking. You can also find out the total size of the market from its financial reports, investor presentations, or even its direct competitors. When you have the total market, divide the company’s revenues into the total market size to calculate its market share. Welcome smaller slices of larger pies In many cases, a company can be losing market share in a rapidly expanding space and still be pulling in greater revenues. That’s because the size of its slice of the market may be relatively smaller, but the slice may be coming from a much larger pie. For example, 10 percent of a $50 million market is much better than 50 percent of a $1 million market. Often investors sell their stock based on falling market share, but that market share has begun decreasing simply due to a significant increase in interest in the space. Still, only focus on market share percentage if there is no tangible change in the total size of the market. Higher highs, higher lows Stocks on the rise will have up days and down days. An important way to spot penny stocks that are truly making price gains is to focus on high and low prices over each time period. When a share reaches higher highs than it hit previously, that is a strongly bullish sign. However, you shouldn’t trust this on its own as a sign of an upward trend, because the stock could just be getting more volatile and trading over a wider price range. Higher highs are great, but higher lows are even more important. Ideally, you want to follow and invest in shares that are making higher highs and higher lows. Such characteristics will indicate a stock that’s truly on the rise and should perform well going forward. Watch professional investors For most stocks, professional investors who follow the company purchase a portion of the shares. Typically, these traders have greater knowledge about the company and often use high-level analysis when gauging the future share prices. Institutional investors, such as hedge fund or mutual fund managers, are highly educated about investing and are building their reputation and career on their predictions. You can put more trust in their outlook for the stock than most other investors. Also, industry or specific company analysts go to great lengths in their research in order to develop their price targets and expectations. When they predict the shares to double from current prices, whether or not they turn out to be correct, you can assume that they do believe their prediction and have a higher likelihood of being correct than the average person. Fundamental launch The financial results from operations for any growing company eventually hit a tipping point. When a penny stock goes from trying to control costs and generate revenues to eventually producing a profit, the shares can really respond. You can predict that tipping point by watching the progress of the fundamentals. Typically a small and growing company will make the step to the higher level by decreasing expenses or at least keeping them stationary, while revenues grow by double digits, such as sales rising by 10 percent each quarter over the previous quarter. By assuming that growth remains at approximately the same rate, you can figure out a company’s revenues for the upcoming (and not yet reported) quarter. If the company has also demonstrated a focus on decreasing its expenses, you can anticipate upcoming profitability. The greatest gains in the price of the shares may come as the company approaches, rather than actually achieves, profitability. This is due to anticipation among shareholders. The positive effect of actually reaching profitability may not produce share price gains that are as strong.

Article / Updated 09-12-2016

To understand types of trading orders and how to use them, you need to know how stocks are bought and sold. When you buy or sell shares of any type of stock, you choose between two main types of orders: Limit orders Market orders Understanding the two types of orders is important for trading any type of equity, but the distinction is particularly significant when it comes to penny stocks. Because low-priced shares are more thinly traded (meaning that fewer shares generally trade hands than with larger stocks), and are more volatile by their nature, using the wrong order type can prove very costly. Limit orders When you place a limit order, you set the price you're willing to pay for the shares you want to buy. For example, you can place a limit order for 200 shares of a stock at 65¢ per share. You will get as many shares as are available at 65¢; if shares happen to be selling for less than 65¢, you will get them for the lower price. However, if the shares have an asking price of 66¢ or higher, your trade order will not take place. That is, of course, unless one of the sellers lowers his asking price down to your limit price of 65¢. With limit buy orders, your trade may not take place if your bid price isn't high enough, but you will never pay a penny more than your stated price. Likewise, with a limit sell order, you will only sell the shares if the buyer meets your price; otherwise, no trade takes place. You pay a full commission to your broker for each day that you execute a portion of your trade order. For example, if you use a limit order to purchase 10,000 shares of ABC stock, and you get 4,000 shares on day one and 6,000 shares on day two, you will be charged two separate trading commissions, one for each day. However, you won't be charged a commission for those days in which your open order doesn't result in any shares trading hands. For example, if you have an order to sell 3,000 shares, but none end up selling at the price you specified, you won't be charged a commission because you didn't sell any of the stock. Due to the price volatility in penny stocks, the small size of the underlying companies, and the limited trading activity in the shares, it's a good idea to use limit orders when buying and selling penny stocks. You should be aware of some potential drawbacks when using limit orders to trade penny stocks: Low availability at your limit price: Penny stocks generally have much lower trading activity than blue-chip or large stocks, so you may only get part (or none) of your order filled. Multiple commission charges: Because limit orders are often only partially filled, the orders are subject to commission charges from your broker for each day your order results in shares changing hands. Wide spread between bid and ask prices: Placing a limit order (or knowing what price to buy or sell shares at) is an additional step for penny stock traders. If a penny stock is bid at 45¢ and the ask is 70¢, that leaves a large price spread of 25¢ between what buyers want to pay and what sellers are willing to take in exchange for their shares. You need to decide a price at which to trade shares. You may want to use the current bid and ask as a guide, but you may even want to go outside of those ranges if your analysis tells you to do so. Limit orders aren't generally the default among brokers, so you need to make a point of selecting limit prices (or instructing your broker appropriately) when you want to enter a trade. Often this involves entering a price you're willing to buy or sell shares at when you place your order through your online broker. However, instructions can differ from one online broker to the next, so make sure that you understand the type of trades you're entering. Market orders When you place a market order you agree to pay the best available price for a stock. For example, if a penny stock has an asking price of 65¢, when you place a market order you agree to pay 65¢ for that stock. Market orders are the default for your broker. Unless you specifically choose to trade with a limit order, you're making a market order. The downside of placing market order is that you can't control the price at which you trade the shares. The upside to market orders is that you get all the shares you try to buy. A market order is simply saying that you accept the best available price. Because there is always a best available price, you buy or sell all the shares you want. You just may end up paying much more for them, or receiving far less, than you expected. Don't use market orders to trade penny stocks. Here are the reasons why: Low availability at the asking price: Penny stocks generally have far fewer buyers and sellers, and much lower dollar amounts in total daily trading, so there may not be a lot of shares available for purchase. If you buy more shares than are for sale at the lowest asking price, your purchase order keeps going up to the next lowest asking price, which can be much higher than the previous price. For example, if you order 200 shares of a penny stock with an asking price of 65¢, but there are only 100 shares available at that price, you may be stuck paying 70¢, 95¢, or even more for the remaining 100 shares. Low trading volume: Many penny stocks are prone to very low daily trading activity. This means that any significant buy (or sell) order may be enough to push the prices up (or down). Wide spread between bid and ask prices: Even if the last trading price was 45¢, you end up paying the lowest available asking price. That price may be 45¢, or due to the generally large spreads between bid and ask prices in most penny stocks, it may be something much higher.

Article / Updated 09-12-2016

Small businesses are the source of the majority of economic growth in the United States, and this is probably true in most nations worldwide. In addition, the small-business sector is America's largest employer. When small businesses need to raise capital, they often go public by listing stock on the market. Some of these companies are tiny, or just getting started, and their value is still low, so they often trade as penny stocks. As such, penny stocks are a big part of the economy. In addition to making significant contributions to the economy, some penny stock companies eventually grow up and become huge corporations with hundreds of employees and share prices of $10 or $50 or more. Most people don't realize that many corporations that used to be penny stocks helped build the economy from the bottom. You're not alone Buying penny stocks isn't as unusual of a practice as you may think. You may not realize all the people around you who have invested in penny stocks. The main reason that you don't hear about people investing in penny stocks is that most novice or new penny stock investors lose money. They don't want to talk about the $1,000 they threw away, and so they sweep their mistakes under the rug. You will hear, or course, from the office jerk who is making money on a penny stock. And you probably heard about it yesterday, and will again tomorrow. Despite the taboo nature of the subject among investors who have been burned, a quiet and significant army of penny stock traders is busy building personal wealth through these low-cost shares. Next time you're at a wedding reception, family reunion, or office party, bring up the topic of investing. See if you can find people who will admit to trading penny stocks. You will certainly find a few, and probably more than you would expect. Room to grow In addition to the growing interest in penny stocks, many of the underlying companies are also expanding, making the economic footprint of smaller corporations more significant. A small company can grow in a variety of ways, including through Market share: A growing market share is a great indicator for the success of the underlying company. If that market share is being taken from direct competitors, a growing market can be an even better sign. Keep in mind, though, that a growing market share may take many months to show up in the earnings or share price of the penny stock company. Revenues/sales: Known as the top line number because it's displayed on the first line of the income statement, the revenues (sometimes called sales) shows you exactly how much money a penny stock is bringing in by selling their product or service. Employees: Growth in employees sometimes demonstrates an increased focus on capturing more sales. Other times it shows that the company is requiring a greater workforce to meet the increased demands of its customers. In either case, as a company grows, so will its headcount. Mergers, acquisitions, and amalgamations: When two or three companies merge into one, or they are bought out by a bigger corporation, a 10¢-penny stock can quickly increase in value. Of course, the original business model of the smaller company will be significantly changed. These events are also quite costly at first, and thus place an additional expense on the corporation. As well, such events are not always great for investors because, although the new company may be bigger and worth more, the original shareholders may not be given fair value in the new corporation. Recurring billing: You can easily analyze the growth in penny stocks that derive revenues from recurring billing and subscription fees. Track the number of recurring billing customers to have a clear representation of the underlying growth and upcoming revenues. Average order size: When the average order size per customer doubles, total revenues should theoretically double as well. Growth is the biggest indicator of potential increases in the prices of penny stocks. If a company is enjoying higher revenues, hiring more workers, or fulfilling larger average order sizes, you can anticipate that the share price may perform very well.

Article / Updated 09-12-2016

Your contact at the penny stock company will usually (but not always) be very optimistic for the company's prospects. Take her hopes and expectations with a grain of salt. Instead of trusting everything she tells you, try to delve into her answers to glean what she is really saying. If she says that the penny stock company is growing rapidly, but also says that the headcount is half what it was a year ago, then something does not make sense. Ask for clarification. If she tells you that the company is expecting to sign a huge, new contract, don't believe it until the contract is signed and announced to the general public. IR contacts are notorious for explaining what they hope will happen as if it were assured. Almost every company has a big contract in the works that they can't speak about just yet. Their hopes turn into reality only about half of the time. More important than the actual details and numbers that the IR contact tells you is her morale. Great penny stock companies on the rise have employees who love what they do, are excited about what's to come, and thoroughly enjoy telling you every detail of the company's story. Getting to the point where you can spot the difference between pleasant responses and genuine excitement takes a lot of patience and more than a single phone conversation or two. The good news is that you start to find how to interpret management and IR comments with your first few phone calls and improve even further with each subsequent conversation. Talking with IR reps will soon become an effective and profitable research technique.

Article / Updated 09-12-2016

You will get the best results from your phone call to a penny stock company if you ask the best questions. Avoid dead-end and vague queries, and instead ask focused questions that require the contact to answer with specific, detailed answers. Some examples of great questions that you should ask management or IR personnel include the following: What is the current headcount at your company? Follow up with "What was it two years ago?" "Where do you expect headcount to be in a year?" "How does this compare to your main competitors?" You will get an idea of whether the total number of employees is increasing or decreasing. If you see any significant trend, probe deeper. "Why is the headcount increasing so quickly?" "Are you able to get enough skilled workers that quickly?" "Is this rapid growth changing the culture of the company?" "What is your company's employee turnover rate?" "How does this compare to the industry's turnover rate?" "Why is your company's turnover so much higher/lower?" On the quarterly financials, you cite $3 million in revenues. What percentage of this is from sales overseas compared to here at home? Follow up with, "Do you expect this breakdown to change, and how?" You want to understand where the growth in revenues is primarily coming from and where the company is expecting the majority of its future sales increases to be generated. Who do you consider to be your main direct competitors? Your main indirect competitors? The answers might surprise you. A fitness gym may have a direct competitor in the form of a gym down the road, but its indirect competition may be weight-loss pills and weight-loss surgery. You need to hear this from them, so that you can assess if they really understand what they're up against. How many of the employees have been with this company for less than two years? This will give you insights into company growth, employee loyalty, and turnover. It also tells you how many of the workers have extensive experience with that particular company. Where did you work before, and how long ago was that? Why did you leave? Getting a good sense of key personnel's experience will tell you volumes about how effective they were in previous roles. How would your competitors describe your product? How would your customers describe your products? Management is often blind to their own weaknesses, making it harder for you to discover the negatives. When you pose the questions like those above, you will often get a more accurate and substantive answer. What do you feel will be the sales drivers for this company? They can't tell you an exact price of where they expect the shares to trade (it's against the law), but they can tell you where the company's growth will come from. From this, you should be able to understand if the shares are likely to move higher. What is your attrition rate (meaning what percentage of customers stop using your service) and why? Companies that have high customer turnover are in a constant struggle to find new ones. Companies that retain current customers benefit from predictable and recurring revenues. How many years can your mine/well produce at the current rate before the resource runs out? (also known as the reserve life index, or RLI) Some resource extraction companies have great financial results and strength for now, but their wells are close to running dry or their mine is almost tapped out, meaning that they won't be producing strong results for much longer. Never invest in resource penny stocks unless you know how many years of reserves they have remaining. Will you need to raise more money to keep operations going? Please outline how much, when, and the potential sources. Penny stocks that are constantly in need of more money can dilute shareholders by dumping more shares onto the market. You will want an understanding of how much investment a penny stock anticipates it will need, and how the company plans to go about securing those funds. The growth rate for your industry is 6 percent, which is double what your company reported on the last quarterly financials. How will you close this gap, and what is the exact growth target? Questions comparing a company to industry trends are fair game, and such questions are certainly very important. You want to find those penny stocks that are outperforming their peers or that at least have a plan to do that.

Article / Updated 09-12-2016

Every publicly listed company has an investor relations (IR) contact (or contacts) who can tell you about the corporation and answer any questions you may have. Many penny stocks make the CEO or other top management available for investors as well. Contacting one of these company representatives is the absolute best way to find out more (and quickly) about a specific company and supercharge your investment results. Oddly enough, few investors take advantage of this opportunity. The contact information for the IR representatives is usually on the company's website, in the investor relations section. Additionally, the IR name and phone number is generally included at the bottom of every press release. In the event that you're unable to locate the information for the dedicated IR contact, just call the company's main line and ask with whom you can speak. If you only do this one thing — call the company — you will very likely be a much more successful investor. You will understand where the company is heading and how they expect to get there. You will even know what obstacles they're facing and how they anticipate overcoming them. And besides all this, the call is free (not including any long-distance charges), doesn't take long, and gives you information that most other investors don't have. You will get a lot more out of your call if you know what to ask ahead of time. You don't want to have a bunch of questions that you can find the answer to just by reading the website. And you don't want to waste anybody's time with queries about the latest financial report if you haven't read it. Keep track of the name of the person you speak to and his contact information. That way, the next time you call, you can say, "we spoke about two months ago, and I just wanted to check in on progress . . . " Keep in mind that even though talking to you is part of this individual's job description, he's still doing you somewhat of a favor. Therefore, respect his time, and don't call too frequently. A quick phone conversation once every few months, or after a major event like the release of the company's quarterly financial results, should enable you to get the information you need to make a smart investment. IR personnel will appreciate your interest in their company. Don't be afraid to tell them that you're a newer investor. If you're a shareholder already, or just a prospective investor, tell them. If they use a term that you don't understand, ask for clarification. Many people don't make the call because they don't know what to ask or they're worried that they may sound foolish. Don't be afraid to make that first call and don't be afraid to make that tenth call! Follow the advice of the Chinese proverb: "He who asks is a fool for five minutes, but he who does not ask remains a fool forever!"

Article / Updated 09-12-2016

Message boards, or chat rooms, are forums where anyone can add their own comments to the discussions. For example, you could visit a message board where participants are talking about a particular stock and jump right in with a bunch of made-up facts for everyone to see, and potentially believe. Message boards are often full of misinformation and blatant lies. Many investors use them to attempt to push up the prices of their favorite stock rather than as a forum to discuss meaningful data. You should decide for yourself if they're beneficial to you. You can have a complete and healthy career trading penny stocks even if you never lay your eyes on a message board. One of the concerns with Internet forums about penny stocks is that you may be inclined to act upon information that will eventually turn out to be misleading. Message boards are also a popular place for promoters to drive their pump-and-dump schemes and make comments with the intention of controlling how you and other investors act. If you decide to visit message boards about specific penny stocks, enter at your own risk and don't believe anything you read.

Article / Updated 09-12-2016

Penny stock newsletters can be a great way to get ideas and guidance on low-priced shares. These resources are almost always provided online, whether through email alerts or a website, although a few send out printed newsletters or faxes. In most cases, the service or website simply asks for your email address, and then they start bombarding you with frequent "hot tips" about penny stocks they claim are going to explode in value. Unfortunately, the free newsletters usually have hidden motivations, and the majority of their selections seem to fare very poorly. Paid newsletters, on the other hand, have a responsibility to provide sound investment opinions and maintain their subscriber base by making legitimate and profitable selections for their readers. It sure seems as though there are more newsletters specifically about penny stocks than any other type of investment. The number of newsletters available means that you have a great deal to choose from, but you should also recognize the equally significant risks. Don't follow the advice of any penny stock newsletter until you understand the difference between the two types you may encounter; free and fee based. The difference between the two types is significant. Free newsletters Free penny stock newsletters make up the vast majority of publications about low-priced shares. As the name implies, you can access them at no cost; instead, all you need to do to receive their free alerts about stocks they claim will explode in price is to provide them with your email address. Generally, free newsletters and stock-alert promoters run websites to drive pump-and-dump schemes. In such schemes, price manipulators buy millions of shares in the company for pennies, tell their subscribers that this company is the next big thing, and then sell their holdings as foolish investors buy the stock for hundreds of times more than it is worth. As soon as the promoter unloads his shares on the market, he stops touting the investment, and the share price collapses far below what his subscribers paid. Most investors who get burned by these pump-and-dumps never took the time to ask why these free websites bothered to bring the penny stocks to their subscriber's attention in the first place. Even though not technically illegal (as long as the pump-and-dump artist mentions his ownership of the shares, or his cash compensation, deep into a fine print disclaimer), pump-and-dump practices are highly immoral and very damaging to unsuspecting investors. Subscription newsletters To gain access to subscription-based newsletters, you must pay a fee. In exchange for that fee, however, you generally get much more reliable and effective guidance from a service that's in the business of profiling high-quality penny stocks. Because fee-based newsletters earn their revenue from subscriptions rather than manipulative pricing schemes, they're motivated to do proper analysis and uncover picks that perform well. If you follow a penny stock newsletter, wait to see if its picks are going up in price before you give it your full trust. Treat its suggestions only as ideas, to which you can then apply your own due diligence. Always proceed with the knowledge that every buy and sell decision you make is fully your choice and responsibility. Be wary of paid promotions in any newsletter — whether free or subscription. Many subscription newsletters receive compensation from the penny stocks they profile, and what appears to be a legitimate newsletter is actually little more than a cleverly disguised paid advertisement. Read the disclaimer that comes with any report, even if it is located in fine print and seven paragraphs deep on another page. Paid promoters are very good at hiding the fact that they receive money to cast the penny stock in the best light. The majority of publications have significant vested interests, and therefore, you should not trust what they tell you.

Article / Updated 09-12-2016

Most publicly traded companies are mandated by their stock exchange to have an investor relations (IR) representative. IR reps help attract prospective investors, and an increased number of investors generally translates into higher stock prices and a broader shareholder base. One of the responsibilities of IR reps is to answer any questions that shareholders have about the company. The IR can be a very valuable resource when doing your due diligence, although very few investors ever take the time to contact them. Like paid analysts, investor relations representatives are beholden to whichever company they represent. However, you will find that they tend to be less about sales pitch and more about facts. IR representatives are also used to speaking with management personnel and media, so they need to convey accurate, detailed information.