Friday, July 9, 2010

Penny Stocks are any stock that trades below $5 per share. Most financial advisors and long-term investors tend to avoid them completely because of the extremely high risk that comes with owning them. They generally tend to fluctuate wildly in price, and although some report spectacular gains in a matter of a few days [or even hours], those who invest in them are generally surprised when they disappear altogether.

Penny stocks are basically low-priced stocks that sell for anywhere from $1 to $5, and are generally considered speculative. The term "penny stock" (also called microcap or small cap stock) is most commonly used for the stocks priced at under a dollar a share. You will not find companies such as Wal-Mart or Microsoft in the penny stock section, but remember – they were small companies too once upon a time. The savvy investor must look upon penny stock investing as a challenge to find "the next big thing."

Unfortunately, the penny stocks are not the ones covered in sources such as the Dow Jones Utilities Average, the S&P 500, the Wilshire 5000, and the Russell 2000. One great resource in the Reference section of your library is the Walker's Manual of Penny Stocks, now in its third edition, which takes a look at 500 companies that may be good risks if you are interested in penny stock investing. Your broker or financial advisor is also a good resource for information. 

Where do I go to buy a penny stock?
Most penny stocks trade in the "over-the-counter" market (OTC), and are quoted on the OTC systems such as the OTC Bulletin Board (OTCBB) or the Pink Sheets instead of with the NASDAQ or New York Stock Exchange. Before buying even one share, be sure to check out the company's financials. If the company is registered with the SEC, you will find their financial statements on the SEC's website. If a company is not registered with the SEC, check with your state securities regulator before investing. 

What should I look for in a company selling for $5 or less per share?
The same thing you should look for in ANY potential investment: quality, not quantity. Sometimes all you have to go on is whether or not a small company has the potential to turn a profit. Once again, do your homework. Find a company that is small yet profitable, has sound growth potential, and could yield significant gains over time. Other things to look for: the company's valuation, existing revenue stream, financial solvency, longevity and history, profitability, and number of employees. 

What are the pitfalls of penny stock investing? 
Because many of these companies are too small to file financial reports with the SEC, false and erroneous information is often the only kind available, which leads to a large amount of fraud being committed. The lack of public information, no minimum listing standards, and risk are the biggest deterrents to investing in penny stocks. 

How do I get started in investing?
All investing starts with the same thing: careful consideration and study. Check out books from the library on the subject, take classes, do some research online, read financial magazines or newspapers do some kind of preparation to make sure you understand what you are getting into before you write any checks or transfer any funds. If you still aren't comfortable with doing your own investing, you can always call a professional to help you.

5 Steps To Researching a Stock Trade Before Investing

Once you determine which business cycle the economy is currently in you can start researching for a trade. It is best to have some sort of a system in place that will be used before EACH trade. Here is a simple 5 Step formula to help get you started.

5 Steps to Investing Online:

1. Find a stock
This is the most obvious and most difficult step in stock trading. With well over 10,000 stocks to trade a good rule of thumb to consider is time of the year. For example, as I write this, it is the beginning of spring. It would make sense to consider stocks that traditionally make runs, or slide if you are bearish, during this time of year.

2. Fundamental Analysis
Many short term traders may disagree with the need to do ANY Fundamental Analysis, however knowing the chart patterns from the past and the news regarding the stock is relevant. An example would be earnings season. If you are planning
on playing a stock to the upside that has missed its earnings target the last 3 quarters, caution could be in order.

3. Technical Analysis
This is the part where indicators come in. Stochastics, the MACD, volume, moving averages, RSI, CCI, support levels, resistance levels and all the rest. The batch of indicators you choose, whether lagging or leading, may depend on where you get your education

Keep it simple when first starting out, using too many indicators in the beginning is a ticket to the land of big losses. Get very comfortable using one or two indicators first. Learn their intricacies and you'll be sure to make better trades.

4. Follow your picks
Once you have placed a few stock trades you should be managing them properly. If the trade is meant to be a short term trade watch it closely for your exit signal. If it's a swing trade, watch for the indicators that tell you the trend is shifting. If it's a long term trade remember to set weekly or monthly checkups on the stock.

Use this time to keep abreast of the news, determine your price targets, set stop losses, and keep an eye on other stocks that you may want to own as well.

5. The big picture
As the saying goes, all ships rise and fall with the tide. Knowing which sectors are heating up stacks the chips in your favor.
For example, if you are long (expecting price to go up) on an oil stock and most of the oil sector is rising then more likely than not you are on the right side of the trade. Several trading platforms will give you access to sector-wide information so that you can get the education you need.

Friday, July 2, 2010

Investment Clubs - What You Need To Know To Profit From Them

Investing in the stock market can be hard for many people. It's a difficult undertaking to engage it on your own. Without any sort of advice or training, you can quickly find yourself out of your depths and there is a real possibility that you could lose your hard earned savings and put your retirement in jeopardy.

One way that many individual investors mitigate this risk is by joining an investment club. Investment clubs are simply clubs that people join that allow them to get together and discuss different investments, sometimes pool their money, and hopefully get a leg up on the stock market.

It has been suggested that the average investment club doubles the value of its stock portfolio every five years. This is a broad generality of course, not all investment clubs are necessarily good simply because they exist. On the other hand, very few mutual funds can claim to have such a successful record, which is something you should really keep in mind!

Why do these silly little investment clubs beat out the big bad mutual funds year after year? It's a good question and there are several reasons...

One reason is that mutual funds have to pay their managers. That money comes out of the general profits of the fund therefore every dollar you pay to the fund manager is a dollar that comes out of your portfolio. Clubs don't pay managers so therefore don't have that added expense.

Clubs are able to invest in smaller and sometimes faster growing stocks were as a regular mutual fund is not often able to do that because they have to focus on large companies simply as a matter of scale. Mutual funds direct billions of dollars and it's physically not possible for them to buy stock in small companies because those small companies may only have five or $10 million worth of outstanding stock and the mutual fund has got billions of dollars that they need to stash somewhere.

One dirty secret in the mutual fund industry is that their quarterly reporting requirements often force them to do a lot of expensive and unnecessary trading. That trading and the fees involved with them comes out of your bottom line, and decreases the value of your portfolio. This obviously doesn't happen in a club setting.

Finally mutual funds usually get buffeted by fund investors who pull out their money when the stock market drops. It's a fear thing. When the stock market falls people get scared and take their money out which drags down the performance of the mutual fund. The fact of the matter is, when the market is down that's the time to buy, not sell... but the herd mentality runs rampant at mutual funds. This sort of thing doesn't seem to happen as much in investment clubs for some reason.

So there you have it, several things you needed to know about investment clubs and why they are better than mutual funds in almost every circumstance. Of course, as with any investment opportunity, be sure to do your own research and your own homework before investing your money in something you don't understand.