Introduction 1
About This Book 1
Foolish Assumptions 2
Icons Used in This Book 3
Beyond the Book 4
Where to Go from Here 4
Part 1: Getting Started with Penny Stocks 5
Chapter 1: Getting to Know Penny Stocks 7
A Big, Fat, “Tiny” Penny Stock Summary 8
Defining Penny Stocks 9
Price per share 10
Market capitalization 10
Stock market 10
Mix and match 11
Why does it matter? 11
Comparing Penny Stocks to Their Blue-Chip Cousins 13
Volatility and speed 14
Safety and risk 14
Investor following and visibility 15
Larger stones take more force to move 16
Chapter 2: Deciding If Penny Stocks Are Right for You 19
Gauging the Popularity of Penny Stocks 20
A high risk/reward ratio 20
Limited funds 22
Risky misconceptions 22
Taking Stock of the Big Business of Penny Stocks 23
You’re not alone 23
Room to grow 24
Making Sense of What You’ve Heard (Much of Which is True!) 25
Penny stocks represent low-quality companies 25
Penny stocks are subject to price manipulation scams 26
Trading penny stocks is a game of chance 26
Making a Fast Million Not! 27
Penny stocks appeal to the impatient 27
Newer investors gravitate to penny stocks 28
Penny stocks appeal to smaller portfolios 29
Being Honest with Yourself: Are Penny Stocks Right For You? 29
Chapter 3: Buying and Selling Penny Stocks 31
The Ins and Outs of the Stock Market 32
Factors influencing which exchange a company lists on 32
A who’s who of stock exchanges 34
Issuing Shares 37
Diluting a good thing 38
How dilution affects investors 39
When new share issues are a good thing 40
When new share issues are not a good thing 41
Stock Buybacks 42
Acquisitions and Takeovers 43
Why penny stock companies are frequently bought 45
Resisting a takeover 46
Understanding which companies are takeover targets 46
Being the buyer 48
Mergers and Amalgamations 49
Stock splits and reverse splits 50
Why you don’t see splits in low-priced shares 51
Why reverse splits are common in penny stocks 51
Bankruptcies 52
Chapter 4: Avoiding Promotions, Scams, and Bribes 53
Why Penny Stocks Are Perfect for Price Manipulation 53
Who is Moving the Price? 57
Promoters 58
Investor or public relations 58
The touter 59
The advisor 59
Rooting Out Poor Quality Companies 60
A good story 60
Financially broken 61
Weak business model 61
Swimming against the trend 62
The 2-pound gorilla 62
Obstacles That Even High-Quality Companies Face 63
Lawsuits 65
Lost customers 66
The 500-pound gorilla 67
Even the Good Can Die Young 67
Part 2: Research and Investment Strategies 69
Chapter 5: Developing a Strategy 71
Trading Risk Free without Using Real Money 72
Keeping it simple: What you need to get started 72
Setting your paper trading parameters 73
Some paper trading considerations 74
Tracking the success (or failure) of your paper trades 75
What You Need Before Your First Trade 76
Choosing a Great Broker 77
Penny-stock-friendly brokers 78
When to upgrade your broker 79
Types of Trading Orders 79
Bids, asks, and spreads 79
Limit orders 80
Market orders 81
Other types of orders 82
Characteristics of a Successful Penny Stock Trader 84
Investing Versus Trading 86
Investing in penny stocks 86
Trading in penny stocks 86
Chapter 6: Doing Your Research 89
Doing Your Due Diligence 90
Skimming the surface 90
Digging a little (or a lot) deeper 91
The Where’s and How’s of Research 92
Stock quotes 93
Trading charts 93
Stock screeners 95
Company financials 95
Press releases 96
Media outlets 97
Paid analysts 97
Investor relations 98
Penny stock newsletters 98
Message boards 100
Calling the Penny Stock Company 101
Be prepared before you dial 101
Questions to ask management or IR 102
Dead-end questions to avoid 104
How to interpret IR responses 104
Corporate and Analyst Guidance 105
Should you trust guidance issued by the company? 106
Following analyst guidance 107
Generating your own guidance data 107
How Expectations Drive Prices: Getting Baked in the Pie 108
Expectations are more important than results 108
Beating estimates 110
Missing guidance numbers 110
Penny Stocks Are Affected by Trends 111
Sector and industry trends 111
Trends in the overall market 113
Trends in consumer and social behavior 113
Market and Company Risk 115
Let the rising tide lift your boat 115
Investing against the current 116
Reacting to nonsystemic (company-specific) risk 117
Reacting to systemic (market) risk 117
Buying What You Understand: The Free and Instant Advantage 118
Chapter 7: Picking a Winner 121
Narrowing Your Choices 122
Your Elimination Criteria 122
Who Do You Trust? 124
Your number one ally: You 124
Considering the motives of others 125
Reviewing their track record 126
Paid advertisements: The wolf in sheep’s clothing 126
Unreliable analysts 127
Stock Screeners 128
Choosing criteria to focus your search 128
Screening your screens: Getting even more focused 130
What stock screeners won’t tell you 131
Choosing Penny Stocks Manually 132
Chapter 8: Penny Stock Manias 133
Wild Speculation and Investor Stampedes 134
Why manias affect penny stocks the most 135
The next stampede: It’s just around the corner 136
Penny Stock Manias of the Past: Learning from Other People’s Mistakes 137
Pot penny stocks 137
Bitcoin mania? 143
The dot-com bubble in penny stocks 150
Surviving and Profiting from Penny Stock Manias 153
Spotting the Next Mania 154
Why the next mania plays out 154
How the next mania plays out 155
Part 3: Trading Penny Stocks 157
Chapter 9: Trading Strategies 159
Scaling In and Scaling Out 160
Averaging Up Not Down 161
The many downsides of averaging down 161
The upsides of averaging up 163
Limiting Your Losses and Locking In Your Gains 163
Stop-loss orders 163
Position sizing 165
Diversification 166
Limit orders 167
Using only the best markets 167
Trading Windows 167
Timing Trades: When to Hold ’Em and When to Fold ’Em 168
Know when to take a profit 168
Know when to sell at a loss 169
Chapter 10: Fundamental Analysis 171
Financial Reports 172
The income statement 173
Balance sheet 174
The statement of cash flows 176
Numbers to Look for in Penny Stocks 179
Good numbers on the financial statements 180
Trends in financial results 184
Acting On Analysis 186
Management is Steering This Ship 187
Who’s who at the helm 187
What have these managers done before? 188
The corporate commitment level 189
News Releases and Events 191
Press releases from the company 192
Coverage from third-party sources 192
The timing of milestone events 193
The Outlook for the Sector and Industry 194
Microeconomic influences 195
Macroeconomic influences 196
Keeping your macros and micros straight 197
Chapter 11: Financial Ratios: Comparing Apples to Apples 199
Leveling the Playing Field with Financial Ratios 200
Eliminating size as a factor 200
Comparing stocks across industries 201
The Five Categories of Financial Ratios 201
Liquidity Ratios 202
Current ratio 203
Quick ratio 203
Cash ratio 204
Operating cash flow 205
Activity Ratios 206
Inventory turnover 207
Receivables turnover 207
Payables turnover 208
Working capital turnover 209
Fixed asset turnover 209
Total asset turnover 210
Leverage Ratios 211
Debt ratio 211
Debt to equity 212
Interest coverage 212
Performance Ratios 213
Gross profit margin 214
Operating profit margin 215
Net profit margin 216
Return on assets 217
Return on equity 217
Valuation Ratios 218
Price to earnings 218
Price to earnings to growth rate ratio 220
Price to sales 220
Price to cash flow 221
Chapter 12: The Abstract Review in Penny Stocks 223
Making Products Meaningful with Branding 224
Why branding is more important with penny stocks 225
When branding is done well 226
Harnessing a Unique Selling Proposition 227
Ensuring Product or Service Acceptance 228
Market Share 229
How to find out the market share for a penny stock 230
Profit from changes in market share 230
Barriers to Entry 231
Gauging barriers to new competition 232
The best first movers are the small ones 232
Marketing Strategy and Results 234
Poor marketing is bottomless 234
Marketing is hard to track with penny stocks 235
Loyalty and Attrition 236
Customer turnover 237
Relative order sizes and frequencies 237
Chapter 13: Technical Analysis with Penny Stocks 239
When Technical Analysis is Good 240
Why TA Often Doesn’t Work with Penny Stocks 243
Use Technical Indicators to Spot Trading Opportunities 244
All Patterns Break Down 246
Technical Analysis That Will Work with Penny Stocks 247
Clues from trading volume 247
Support levels 248
Resistance 250
Trends are friends 251
Price spikes 252
Price dips 253
Topping out patterns 254
Bottoming out patterns 256
Consolidation patterns 257
On-balance volume 260
Momentum indicators 261
Moving averages 262
Relative strength 263
Part 4: Scaling Up Your Success 265
Chapter 14: The Surprising Power of Mental Focus 267
Taking a Situational Audit 268
Unless you increase your time and energy 268
When the weeds envelope you 269
Why the dearth of quality? 271
Are Your Expectations Realistic? 271
Truly knowing yourself 272
The purpose is deeper 273
Goals? Not everyone needs them 273
The first step is the longest 273
Your Penny Stock Plan 274
Frequency and fine-tuning 276
You do not get to have luck 276
Take a forced rest 277
Chapter 15: Finding the One Strategy That Works 279
Your Solo Strategy 280
Do less of what doesn’t work 281
Rinse and repeat 282
Simplicity is misunderstood 282
One Penny Stock Truth Above All 282
Dancing on quicksand 283
Changing landscape 283
Adapting to What’s Next 285
Creating a Ritual 286
Shrine, studio, war room, or kitchen table? 287
A statement of commitment 288
Opportunity Costs and Your Results 288
Unseen small investments for major gains 289
Extrapolate your destination 289
Chapter 16: Debriefing for Dollars and Cents 291
Your Opinion is Your Mental Blind Spot 292
Comparing results to expectations 292
Comparing expectations to environments 293
The intentions-to-profits contrast 295
The assumptions you were given 296
Media Imagery and Misunderstandings 297
Tunnel-vision gurus 297
Trusted friends and family 298
Buying excitement 298
Building Your Investing Power 299
Collect 100 mistakes 301
List your lessons 301
Take an emotional assessment 303
Change yourself to change your results 303
Part 5: The Part of Tens 307
Chapter 17: Ten Rapid Result Tactics 309
Call the Company 310
Average Up 310
Don’t Confuse Market Risk with Company Risk 311
Try the Product, Use the Service 312
Compare the Wares 313
Paper Trade 313
Know the Corporate Life Cycle 314
What’s Really Driving the Share Price? 315
Watch the Short Interest 316
Don’t Diversify, Pinpoint Invest Instead 317
Chapter 18: Ten Trading Truths 319
Investor Sentiment is Contrarian 319
Big Moves Occur During Brief Trading Windows 321
Greater Volume Means Greater Sustainability 321
Making Up for Losses is Harder than Preventing Them 322
Bigger Things Take More Energy to Move 322
Rapid Rise, Rapid Fall 323
Dilution Disguises Losses 324
Buy the Rumor, Sell the Fact 324
Don’t Try Catching Falling Knives 325
Resistance Levels Can Flip 326
Chapter 19: Ten Key Considerations for Companies 327
Barriers to Entry 327
Competitive Advantages 328
Market Share (and Room for Growth) 329
Customer Diversity and the Company’s Reliance 330
Allies 331
Insider Ownership 331
Institutional Ownership 332
Positioning 333
The Secret of Flag Fall Fees 333
It’s All About Recurring Revenues and Attrition 334
Index 337
