Penny Stock Jockey Math

It’s time to make cents of penny stock math.

The one characteristic of all millionaires, no matter what field, is their ability to know when they’re making money and when they’re not. They ensure they’re not being “penny wise and pound foolish.” Unfortunately, most penny stock investors don’t think that way.

Lets do the math. Sure penny stocks are cheap. But only if you buy right and then sell right. So lets review the rules of penny stock math.

Rule 1: Buy right. By this, I don’t mean you have to buy at the bottom (although that helps!). It means buy the right quantity. And its important to use the right broker.

Rule 2: Sell right. By this, I don’t mean you have to sell at the top (although that helps!). It means sell at the right time, and for the right price.

Let me explain further.

A lot of people make the mistake of buying the wrong number of shares. If the penny stock is really cheap, they buy way too many shares. This is not a problem if the promoter is able and brings in huge volume. However, if he’s not able, no matter how cheap the stock is, without volume, you will not be able to sell your position and make a profit.

By the same token, a lot of people make the mistake of buying too few shares. If the penny stock is priced closer to a dollar or higher, a lot of speculators will buy about 1,000 shares or less. This limits your ability to profit in two ways. If the promoter brings in volume, 1000 shares need to rise in price much higher in order for you to make a decent profit. And the small amount of shares all need to rise in price much higher in order for you to cover your commissions.

And that leads to the second part of buying right. Since most brokers/analysts don’t bother with penny stocks, why use a full service firm? A full service firm is fine for your blue chip retirement funds, but for penny stocks use an online firm that charges a low price per trade and has no minimum dollar or share order. This will ensure more of your profits stay in your account.

The ideal number of shares you should buy is determined by your risk profile. If you’re a beginner, you need to balance carefully. Just as a business has to keep a close eye on cash reserves vs. investments for growth, so do you. I don’t recommend beginners put more than $5,000 into a penny stock that’s priced above $0.50, and not more than $3,000 into a stock priced under. This will give you enough shares that a commission isn’t a problem, enough shares to make a profit, but not too many that you’ll be stuck if volume doesn’t come in.

Just as important as buying right, is selling right. Greed is dangerous, but necessary, and naturally comes into play. After all, if you weren’t a little greedy, you wouldn’t be investing in penny stocks. So the best time to decide your exit price is right when you buy. Pre-determine for yourself the kind of return you’re looking for, and the amount of time you’re prepared to wait. For example, if you said to yourself I’d like 20% in one month. Then stick to it. As soon as you’re up 20%, whether its in an hour or a month, get out. If it hasn’t hit your target in the time you’ve allotted, re-evaluate. Remember, its not the last deal you’ll ever be in and every dollar you have tied up is a dollar you can’t invest elsewhere.

When a stock is rising quickly its tempting to stay in, but remember, they can reverse direction just as fast. Its not something you control. The only thing you control is the amount of return you want and the time you’re prepared to wait.

Do the math and you’ll profit more times than not.

Become a member of the Penny Stock Jockey Winners Circle and start trading penny stocks for profits today.

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Are All Penny Stocks Created Equal?

Amazingly enough, a number of American financial sector stocks were thrown into penny stock realm in the past two weeks. In the past few months, even bigger banks declared bankruptcy.

The SEC defines penny stocks as “low-priced (below $5), speculative securities of very small companies. While penny stocks generally are quoted over-the-counter, such as on the OTCBB [www.otcbb.com] or in the Pink Sheets [www.pinksheets.com], they may also trade on securities exchanges, including foreign securities exchanges. In addition, penny stocks include the securities of certain private companies with no active trading market.”

By this definition, the financial sector stocks – stocks like Citibank and Bank of America, are penny stocks.

Last fall, the SEC took the unprecedented action of banning short sales and calling for a short cover on financial sector stocks that had been beaten down by the shorts. It’s a lament that penny stock companies have been complaining of for years, but went unheeded.

And now these established, down-on-their-luck financial companies have convinced the American public that they are deserving of billions in taxpayer dollars because they are established companies and not traditional penny stocks as defined by the SEC.

So what have we really done for these behemoths? We’ve altered the definition of penny stocks to accommodate them. We’ve altered the level playing field by exempting them from short sellers. And now we’re giving them tax dollars like some government sponsored clinic while hard working entrepreneurs have to fight for their place in this shrinking economy.

Are these billion dollar bailout babies really that different from your traditionally defined penny stock?

Traditionally, risk characteristics attributed to penny stocks include:

1. Penny stock companies are usually start ups that lack of information about the company, its history and its management. I would argue that financial sector companies suffer from the same lack of transparency. After all, how could anyone not see the leverage and the misguided asset classifications and still invest in these behemoths? The derivatives are way too complicated for the layman to analyze…so we rely on the banks to tell us the truth, while they have a conflict.

2. Large control blocks. Penny stock company founders traditionally have a large block of stock (albeit restricted) to ensure their interests are aligned with the rest of the shareholders while ensuring they cannot sell their shares for a quick profit at the detriment of other shareholders. In the financial sector, these large blocks are held by fund managers – who similarly cannot sell their blocks quickly without lowering the market price and thereby impairing the return to themselves. What’s more, the CEO’s of the companies barely have any stock in their portfolios – eliminating the alignment with shareholder values. Instead, it’s become vogue to pay these CEO’s via stock options – giving them an incentive to show short term results and then cash out their options while the rest of the investing public holds shares that were sold by insiders.

This is done by using unwitting brokers, paid analysts and unquestioning media to tow the company line. And because the CEO’s and the companies have been held in high esteem, no one questions the use of these tools or their motives.

Penny stock companies often use similar tools – only with a penny stock it’s called stock promotion. And penny stock companies have better motives: without stock promotion, the best company in the world won’t be worth anything because no one would have heard of it – and therefore the enterprise would be hard pressed to raise money for growth. Promotion is a driving investment criterion for choosing a stock to invest in at www.pennystockjockey.com.

The issue with promotion is that the SEC often believes that stock promotion involving a penny stock needs more supervision than the promotion being conducted by billion dollar house hold names. Is there in fact an opportunity for fraud in the penny stock market? Of course there is.

But I contend that the risk is much higher with well established companies that have CEO’s holding stock options (big motive for early liquidation since options expire) rather than actual restricted stock (unsellable) for which they actually paid (as many penny stock companies experience). Empirical proof is offered by the billions lost in the financial sector right under the nose of, and with the blessing of the SEC and other regulatory bodies than has ever been lost on penny stocks.

3. Potential for fraud. Penny stocks are often used by scam artists who sell them through spam email or off-shore brokers. As the recent IRS/SEC probes have proven, many, many, many American CEO’s have offshore accounts making them no more honest or dishonest than the operators of penny stock companies.

Both traditional penny stock startups and the fallen as exemplified by the financial sector have the potential for growth and for fraud. Both are blighted by cash requirements, by short sellers and by image problems.

The difference is that the fallen companies have the government and SEC fighting for them while the typical startup penny stock company is vilified. The dichotomy is even more surprising when we stop to think that economists have long been telling us, and the American experience has long proved that the start-up is what drives the economy, diversifies the job base, creates the most jobs and is lean enough to take advantage of changing times.

So I ask you America: Are all Penny Stocks Created Equal?