Hot Penny Stocks
Microcap (Penny) stock trading is considered a lucrative investment. It offers a way for people with very little money to enter the stock market and make a lot of money so fast. Nowadays many people are encouraged to open their new trading accounts to start trading micro caps. But like any another kind of investment, one should have a clear idea of what the thing is in order to become successful.
Understanding Microcap (Penny) Stocks
The ‘cap’ referred to in the micro cap stock is short for capitalization. Market capitalization refers to the monetary value of the business. Anyone can work this out by finding out just two pieces of essential information: the number of shares it has in total, and the value of each of those shares. Multiplying them together will give you the market capitalization value. The term Microcap (Penny) stock or micro-cap refers to the stock of public companies with a market capitalization of between $50 million and $300 million. These are companies with low capitalizations, thus the name “micro” applies. However, a micro- cap stock is not the smallest classification. A nano cap stock is even smaller. Nano cap stocks are shares of companies with a market capitalization of less than $50 million.
Microcap (Penny) companies typically have limited assets so they tend to be low priced and trade in low volumes. The market for micro cap stocks can be very small, and while you can purchase the stock, you may find difficulty selling it. Micro cap stocks are subject to very large swings in price since the volume is very small Micro-cap stock companies are considered extremely volatile. Partially, it is because the market capitalization of micro-cap stock companies is simply less than those of larger corporations thereby allowing the price of the micro-cap stock to be more easily influenced by a single large trade. Since the market is small, a single investor can influence the price of the micro cap stock to their own profit at the expense of the other investors.
Many micro-cap and nano-cap stocks are traded over-the-counter (OTC) with their prices quoted on the OTC bulletin board (OTCBB) or the Pink Sheets.
Over-the-counter (OTC)
Over-the-counter or off-exchange trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges. Stocks here are traded via a dealer network as opposed to on a centralized exchange. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network. The reason for which a stock is traded over-the-counter is usually because the company is small which makes it unable to meet exchange listing requirements.
OTC Bulletin Board (OTCBB)
The OTC Bulletin Board or OTCBB is a regulated electronic trading service offered by the National Association of Securities Dealers (NASD) that shows real-time quotes, last-sale prices and volume information for over-the-counter (OTC) equity securities. Companies listed on this exchange are required to file current financial statements with the SEC or a banking or insurance regulator. There are no listing requirements, such as those found on the NASDAQ and New York Stock Exchange, for a company to start trading on the OTCBB. Companies which are listed on the OTCBB are not a part of the NASDAQ Exchange. Fraudsters tend to mislead investors by making them believe that it is part of the NASDAQ Exchange. The truth is, OTCBB stocks are not especially large or stable and are considered very risky. Also, because OTCBB stocks tend to trade infrequently, the bid-ask spread is larger. The OTCBB is a quotation medium for subscribing members, not an issuer listing service, and should not be confused with the NASDAQ stock exchange. Investors must contact a broker-dealer to trade OTCBB securities. Investors do not have direct access to the OTCBB service.
Pink Sheets
Pink Sheets are daily publications compiled by the National Quotation Bureau with bid and ask prices of over-the-counter (OTC) stocks, including the market makers who trade them. The Pink Sheets are different from the OTCBB. Companies on the Pink Sheets are not required to meet minimum requirements or file with the SEC. Pink sheets also refers to OTC trading. The pink sheets got their name because they were actually printed on pink paper. Pink Sheets started out as a daily quote service provided by the National Quotation Bureau. Companies decide to be on the Pink Sheets when they are too small to be listed on a national exchange or they do not wish to make their budgets and accounting statements public. Companies listed on the Pink Sheets are difficult to analyze because it is tough to obtain accurate information about them. The companies on the Pink Sheets are usually penny stocks and are often targets of price manipulation. For companies to get a pink sheet, they need a licensed broker who is a member of the National Association of Securities Dealers (NASD) to quote the stock. Once listed, the company remains there. One advantage to these Pink sheet stocks is the low price.
Analyzing Penny Stocks
Micro-cap companies do not bring about fat investment banking fees for Wall Street firms. For this reason analysts do not cover regular research on them. Therefore it is harder to analyze a small company than a large one. Investors must do their original research because of the small amount of information available. The approach in analyzing a micro-cap company is the same as analyzing a bigger one.
.52-week High/Low Trading Range. Like any potential investment, you might start out by assessing the current stock price against the highest and lowest price at which a stock has traded in the past 12 months, or 52 weeks. Many investors see the 52-week high or low as an important indicator. For example, a value investor may view a stock trading at a 52-week low as an initial indication of a possible value play. A clever value investor will have to conduct a lot more analysis to come to this conclusion, but the fact that the stock is trading at its 52-week low can be a potential starting point.
Valuation Ratios. One should consider the price/earnings multiple and the price/book multiple to see if the stock looks cheap or expensive. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. But we should not base it on P/E ratio alone for this does not show the whole story by itself. It would be better to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. Price/book ratio on the other hand, is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company.
Financial Statements. It is worthwhile to review the company's financial statements to learn how much net profit is being earned on revenues, how high debt levels are compared to the company's capital base and whether the company is generating cash or burning it.
Micro Cap Stocks Comparison
Before buying micro cap stocks it is important for the purchaser must understand how the stocks are different from traditional stocks. One must understand that micro cap stock have much less public information available about them through the SEC (Securities and Exchange Commission). There is less transparency about how the company conducts its business or maintains it financial records so it is more of a guessing game. Another important thing to consider is that there is no minimum listing standard for the micro cap stock companies and so micro cap stocks are considered risky investments. It is necessary to look at the advantages as well as the disadvantages of a micro cap stock before purchasing.
Microcap (Penny) Stocks Advantages
For more than a decade already, the micro cap and small cap stocks have outperformed larger stocks in the market. Particularly micro cap stocks traditionally outperform large caps during a recession and early stages of a recovery. Micro cap stocks offer a way to make money fast without a major expend of your hard earned capital. If you have very little money to get started trading you get more bang for the buck and have an opportunity to start a second income. This kind of stock can yield high rewards for the small amount of money you will use to trade them. But you must carefully research these stocks. With Microcap (Penny) stocks returns of 50%, 100% and 1000% and more in a day even an hour is a common occurrence. Stock promotions could make stocks gain 100%. Because this has been proven by research, the company becomes appealing to the public. Some companies just take the advantage of starting with small stock but have the end goal of making it into big markets. Microcap (Penny) stocks can be profitable in the right hands. Since they are usually from smaller and largely unproven companies, they can be purchased at bargain prices. An investor could get under a huge price increase when the company suddenly has a growth surge. He would also make a large profit.
Microcap (Penny) Stock Disadvantages
Micro cap stocks are usually listed on the Over-The-Counter Bulletin Boards (OTCBB) and do not have to meet minimum listing standards that the larger caps must in order to keep their listings on the major stock exchanges. These stocks can be thinly traded and volatile. You really cannot tell whether you are going to be successful or not. Purchasing Microcap (Penny) stocks are not advisable to those who are not risk takers. Researching penny stocks is difficult. Penny stocks are common shares of small public companies that trade at less than $1.00. There are very little clues provided to know about these huge gainers. It is difficult to tell if the promotion is legitimate or not. Sometimes regular investor s or traders involve companies that have a poor business plan, a product that has no demand. Investors might also be fooled by some companies which are already headed for bankruptcy.
It is important to gain a full understanding of the small cap's business, how the company makes money and its plans to grow. Aside from that one should also be aware of the fraud.
Why Are Penny Stocks Risky?
Four major issues arise when you decide to buy these securities:
Absence of Information Transparency. One thing we always believe is that the key to any successful investment strategy is acquiring enough tangible information to make informed decisions. For micro-cap stocks, information is much more difficult to find. Companies listed on the pink sheets are not required to file with the SEC and are thus not as publicly examined or regulated as the stocks represented on the NYSE and the NASDAQ exchanges; Also much of the information available about micro-cap stocks may not be so helpful because they do not come from reliable sources.
Minimum Standards Not Required. With micro cap stocks there are no minimum standard requirements to remain on the exchange. Sometimes, this is why the stock is on one of these exchanges. The tendency is that when a company can no longer maintain its position on one of the major exchanges, the company moves one of these smaller exchanges. While the OTCBB does require companies to file timely documents with the SEC, the Pink Sheets has no such requirement. Minimum standards therefore act as a safety cushion for some investors and as a benchmark for some companies.
Lack of History. Most micro cap stocks are either newly formed or approaching bankruptcy. As a result these companies generally have poor track record or worse none at all. This situation would just make it harder for investors to determine which companies are good ones. Lack of history magnifies the tendency of the investors to choose a wrong company. .
Liquidity. Liquidity refers to how easy it is to buy and sell shares without seeing a change in price. If, for example, you bought stock ABC at $10 and sold it immediately at $10, then the market for that particular stock would be perfectly liquid. If instead you were unable to sell it at all, the market would be perfectly illiquid. When the stock have no much liquidity there is the possibility that the stock you purchased cannot be sold. If there is a low level of liquidity, it may be hard to find a buyer for a particular stock, and you may be required to lower your price until it is considered attractive by another buyer. Lowering the price would mean lesser gains. Also, low liquidity levels provide opportunities for some traders to manipulate stock prices. An example of this is the pump dump scam wherein some investors buy large amounts of stock, hype it up and then sell it after other investors find it attractive.
Investment Fraud
Investment fraud as it relates to stock fraud, also known as “stock fraud”, can also be referred to as securities fraud. It encompasses a wide variety of illegal practices where investors buy or sell stocks or other investments in commodity or equity markets (stock markets) based on false information. This type of false information undermines the basis of trust in a transaction and also violates the “fair market” and “free trading” economic theories of markets and thus is against securities laws. The government has an interest in the matter because it is “fraud”, it can result in harm to corporations, shareholders, and at times the overall United States economy.
Microcap (Penny) Stock Fraud.
Microcap (Penny) stock fraud generally takes place among stocks traded on the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service, stocks which usually do not meet the requirements to be listed on the stock exchanges.
The following are some of the several types of investor fraud:
Pump and dump. Pump and dump scam is when the fraudulent party misleads the public by making information available publicly that is not true in order to affect the price of the underlying stock. It is, in essence, stock fraud, on the penny stock, or Microcap (Penny) markets. The fraud has the target of increasing the trading price of the stock through manipulative or artificial means. The trading price of an owned stock through fraudulent, lies, or at best misleading press releases or other publicly made releases or “information”. The obvious reason of course is to then sell at the artificially manipulated higher price. Of course once the fraudulent party “dumps” their shares the underlying fundamentals of the stock catch up and eventually correct themselves to the “true value”. Fraudsters use this with small, thinly traded companies because it is easier to manipulate a stock when there is little or no independent information available about the company. What actually happens here is that a stock promoter claims to have information about impending news. Newsletters that pretend to offer unbiased recommendations then convince people to see the company as a hot stock. Messages in the chat rooms and email spam would then persuade people to buy the stock quickly not knowing about the nature of this fraud. As investors purchase the stock, it makes it of high demand and therefore raising the price. Other people would then be encouraged to buy shares as well as the rise in price looks real. As a result some investors are left holding stock which is less significant than what they were actually paid for.
Hack, pump and dump. A more modern spin on the pump and dump attack is known as hack, pump and dump. In this form a person purchases penny stocks in advance and then uses compromised brokerage accounts to purchase large quantities of that stock. The net result is a price increase. This increase would then be pushed further by day traders seeing a quick advance in a stock. The holder of the stock then sells his stock at an amount which is higher than what is right.
Dump and dilute. In a dump and dilute scheme, fraudulent companies issue shares repeatedly that result in the stocks reverse-splitting schemes, where companies repeatedly issue shares just to take investors' money away.
Off-shore scams. Unprincipled companies offer for sale stocks that were originally made part of a Regulation “s” offering. These are normally offered and sold to fraudulent parties at a large discount. These fraudulent parties characteristically present themselves as investors that are “off-shore”. These fraudulent parties then sell the stock back to gullible U.S. investors at highly inflated rates, pocketing massive profits that they share with company insiders. These dishonest brokers will use high-pressure "boiler room" sales tactics to persuade investors to purchase stock. A SEC rule known as "Regulation S" allows companies to not have to register stock that they sell outside the U.S. to foreign or “off-shore” investors. The SEC permits companies selling stock outside the U.S. to foreign investors to be exempt from registering stock.
Be Protected Against Fraud.
There are all sorts of scam artists out there that will try to steal your money. Scammers often target investors. However this should not deter you from investing in the stock market. You just have to be ready and alert to be able to overcome different scams. Here are things you must do to be protected against fraud.
Don’t ever allow yourself to be pressured.
Fraudulent micro-cap brokers work in temporary offices with several telephones manned by salespersons who aim to push stocks by promising amazing returns and great success in the investment. Keep in mind that these people are trained for this and so they are very good at it. Never allow yourself to be pressured into making an investment. Don't make any kind of investment on something that you do not really understand. Do not allow yourself to be tricked by the idea that you could get rich in an instant. The person offering the investment opportunity tries to hard sell you. He isn't pushy because he wants to help you. He is pushy because he wants to help himself. In case you face this situation just hang up the phone or use answering machines to screen calls.
Be wary.
There are people from a stockbroker who just want to dump their stocks. They use screen names on chat rooms and online forums or send you e-mails.
Consider the source.
When you see an offer on the Internet, assume it is a scam, until you can prove through your own research that it is legitimate. And remember that the people touting the stock may well be insiders of the company or paid promoters who stand to profit handsomely if you trade.
Think twice.
Analyze everything first before you invest in a certain stock. Avoid unreliable press releases or data about a certain company. Check if that certain stock has undergone any SEC suspension in the past. Be aware that the SEC has the power to hold the trading transactions of that certain stock for ten days. Verify information through the SEC internet site.
Get important Information.
Check your broker’s background before doing a transaction with them. Ask for your broker’s CRD number and verify it through your state security office. Written data is very important. Don’t just rely on what they say to you. Call your state or provincial securities office to know about the broker and check if the investment is properly registered. Pay attention to who is behind the scenes.
Research the Opportunity.
Always ask for the prospectus or current financial statements. Carefully read it. Check the SEC's EDGAR database to see whether the investment is registered. All companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically through EDGAR. Anyone can access and download this information for free. Some smaller companies don't have to register their securities offerings with the SEC, so always check with your state securities regulator, too. Since that it is not easy to be able to access or find information about small-cap companies it is important that you do your own due diligence. Surf the internet and read articles related to the type of investment you are planning for. Through these we can avoid being tricked by fraudsters out there.
Are You Really Ready To Invest?
Some people prefer investing in a micro cap mutual fund which is an excellent alternative for new investors who are unfamiliar with the process of analyzing a stock. It might be uncomfortable to place a large percentage of a portfolio in any one given micro cap stock. The fund allows the investor to take advantage of a much larger pool of micro cap investments that is under professional management. There are also opportunities given to those who would like to invest directly. They just have to follow a few rules and good profits could be attained by investing in micro cap stocks.
Micro cap investors consider potential rather than current revenue streams of the company. There are many factors to consider determining whether a company is a good investment. One is the company’s expenses. If the company is losing money it does not automatically mean that it is a bad investment. Many solid companies are in the red because of a quarter of unusually high expenses that may be parts of research and development. It may be money well-spent, which will lead to sales in the future. It is also advisable to check the sales of the company, whether or not they spend some money on building a good multi-channel sales infrastructure. One thing more is considering whether the company is capable of producing goods which it would need to fulfill orders and become profitable.
The Macro And Micro Of Hot Penny Stocks
Many people ask what the difference is between a penny stock and Microcap (Penny). The simple answer is they are both stocks that usually sell for fewer than five dollars and most of them sell for pennies. Micro cap stocks refer to a business which has a low market capitalization value. Because the shares tend to be very low, the company and its shares won’t make too many headlines. While many people haven’t heard about micro cap stocks, they probably have heard about penny stocks before. As the name suggests, penny stocks are cheap stocks that many times come in at under a dollar in price per share. However they can be priced higher than that. Micro and small cap refer to company capitalization, that is, its size, whereas penny stock refers to the stock price and does not indicate the size of a company. You can see then that a penny share is concerned primarily with the value of each individual share. Penny shares do not directly have anything to do with the market capitalization of the company that holds them. Micro cap stocks are different because these point to a company that has a relatively low value when it comes to its place in the world.
Dangerous Penny Stock Fallacies
There are fallacies pertaining to macro cap stocks. One is that many of today's stocks were once macro cap stocks and that there is a positive correlation between the number of stocks a person owns and his or her returns. Investors who have fallen into the trap of this fallacy believe that large companies were once penny stocks that have appreciated to high dollar values. Rather than starting at a low market price, these companies actually started pretty high, continually rising until they needed to be split.Another reason that many investors may be attracted to macro cap stocks is the idea that there is more room for appreciation and more opportunity to own more stock. If a stock is at $0.10 and rises by $0.05, you will have made a 50% return. This together with the fact that a $1,000 investment can buy 10,000 shares convinces investors that micro cap stocks are a rapid surefire way to increase profits. However they forgot to consider about the downside of the situation. A $0.10 stock can just as easily go down $0.05 and lose half its value. Most often, these stocks do not succeed, and there is a high probability that you will lose your entire investment.
To Sum Things Up
Massive information is needed before investing in any kind of capitalization whether big or small. All kinds of investments have their pros and cons and so critical thinking is very important. Whatever stocks you decide to invest on keep in mind that extensive research is required as to not end up being unsuccessful.