Yet some readers want us to go all the way down to the cellar. “Why don’t you ever recommend penny stocks?” one subscriber asked. “After all, it’s easier for a 50 cent stock to go to $1 than for a $50 stock to go to $100.”

For starters, it’s not.

Over the years, dozens of studies have shown that lower priced stocks don’t do better than higher priced stocks. In fact, they do considerably worse.

Ironically, while it’s not easy for a 50 cent stock to go to $1, history shows that going from 50 cents to zero is like falling off a log.

Reasons Why Penny Stocks Stink

There are other reasons I won’t touch penny stocks with a barge pole:

• For starters, the vast majority of tiny, unprofitable companies are such ridiculous long shots they don’t even merit your attention. Most of these companies have little if anything in the way of profits, not to mention the first prerequisite: sales.
• Secondly, you could drive a cement mixer through the bid/ask spread on many of these shares. If a stock is offered at 30 cents and bid at 24 cents, for instance, you’re down 20% as soon as you get your trade confirmation. (And that’s before commissions.)
• Thirdly, penny stocks are thinly traded and easily manipulated. You may buy a penny stock and see it zip higher. But then try getting out. It’s pretty disheartening to know you can drive down the price of your stock simply by selling a couple thousand shares at market.

And then there are the outright scammers…

Penny Stock Scams & Penny Stock Promoters

Often referred to as a “pump and dump,” a penny stock scam is when the insiders talk the stock up on one hand while bailing out like there’s no tomorrow on the other. That’s usually because despite the great story – and make no mistake, the stories are always fabulous – the company’s genuine business prospects are usually nil.

But penny stock promoters want you to trust them, to believe in the hot tip.

If you’re going to evaluate a penny stock, here’s how the penny stock promoters would like you to do it:

• By recognizing the multi-billion dollar market they intend to operate in.
• By considering the enormous profits they’ll generate when their technology is finally commercialized.
• By noting the proven reserves of the mining company operating next door.
• By the preliminary results of their Phase I trials.
• By any criterion you can think of except what the company is actually earning… Because that figure is virtually always zero.

A Few Basic Penny Stock Precautions

If you insist on discovering these lessons for yourself, if you doubt my words, or for some reason are drawn to penny stocks like a moth to a flame, at least take a few basic precautions.

Start by reading the company’s most recent quarterly or annual report…

• Does it have sales or earnings?
• What kind of debt is it carrying?
• How long has the company been in business?
• Who are the people behind it?
• What is their track record?
• What is their rap sheet?

In other words, if you’re going to roll the dice, make sure it’s a genuine speculation, not just a mindless crapshoot.

Also, take a look at what the insiders are doing. If the insiders – the ones who seem unable to contain their enthusiasm for the company’s near-term prospects – are dumping the stock en masse, you know all you need to know.

Run.

Some will say I’m unduly pessimistic. (Penny stock promoters, especially.) And, clearly, a few successful companies did start out as penny stocks.

But for every success story there are hundreds of penny stocks whose charts bear an uncanny resemblance to the last flight of the Hindenburg.

In short, there are plenty of smart ways to invest your money. Toying with penny stocks, in my view, is one of the dumbest.

Good investing,

Alexander Green
Investment U

The phrase “penny stock” tends to scare many investors away. But, those are the companies you read about that returned triple and even quadruple-digit returns.

Penny stocks are usually small and newly created companies. While still trying to get established, penny stocks are analogically infants and toddlers compared to large-cap adult companies. With great parental guidance from a superb managing team, penny stocks can hold a promising future.

But, as with all children, they occasionally run amok. Some fall into the financial hole and can’t get out. Others have great balance sheets but no growth strategy. So, how do you find one that is ready to mature?

Do your research! Get background information. There may not be an abundance of information on the company because of lack of media attention. So research patiently and vigilantly.

Check if the managing executives and board members are respectable and passionate towards the company. A positive staff is always going to produce great work and show that through the company’s bottom line.

With these small companies, you might even have a chance to talk to executives and directors. Give them a call, and see what kind of response you get.

Make sure the company is in a growth position and if they are compatible with future trends and markets. A company’s willingness and desire to expand is a good indication of the value of a company.

Another good way to analyze a company is by reviewing a company’s financial reports and accounting sheets. 10-K annual reports are a great source to attain information. Comparing and analyzing numbers throughout the years will show the “guts” of a company that you won’t read or hear about in the news. However this process can be challenging…

In compliance with SEC rules, companies have to report their financial records. Inside executives know that these records are easily accessible and can show the value and worth of the company. As a loophole, firms will try format the reports differently every year to make the evaluation more difficult and tedious to analyze.

Be sure to take your time analyzing everything. If a company continues to throw obstacles in its reporting, that might be an indicator to stay away.

Another important task before investing in a penny stock is to analyze the industry it’s in. Small-caps, in general, get tossed around both up and down more than their larger counterparts. If you are looking at a junior precious metals miner, take a look at what the large miners are up to.

Also, make sure you study what, if anything, the underlying asset of the company is doing. Using the junior miner as an example, make sure you are comfortable with the direction the metal the company is mining is going. If you don’t think gold will continue to rise, you probably shouldn’t invest in a gold miner.

Another important factor you should look at is market share. Obviously, most penny stocks don’t control a large share of their market. But make sure the company you are looking at has a strategy for that. And if it doesn’t, make sure that the industry is growing fast enough to create an opening for the company.

The best way to invest in penny stocks is to find niche companies. Usually, large companies leave areas open that just aren’t worth the hassle for the blue chip to fill. That may be the perfect place to build a smaller company. Make sure that niche has enough room to grow in before you invest.

It takes plenty of time and effort to go through all of these important tasks, but the end result is worth it.

Mark Louie
The Penny Sleuth

On Nov. 19, 1984, you could have picked up shares of the emerging biotechnology firm Amgen, Inc. (AMGN: NASDAQ) for $3.63.

Those shares rose steadily for the next 20 years and were worth more than $85 as recent as 2005. Taking into account Amgen’s five splits over the past 23 years, you can knock that original 1984 price down to about nine cents a share.

It’s almost impossible to believe that a company that would cost you pennies could turn into a $100 billion pharmaceutical giant specializing in the treatment of rheumatoid arthritis, anemia and psoriasis.

But Amgen did it…and investors who saw its potential laughed all the way to the bank.

That story — and so many others like just it — is pretty recognizable. Replace the company’s name and a few numbers and dates, and you have just about everyone’s reason for becoming interested in the stock market.

If you didn’t think the market could make you rich, why would you waste your time with it? The fact is, only two small groups of people actually do get rich with stocks…the brokers and the penny stock enthusiasts. Let me explain…

The brokers make money off of trading stocks. Whether you buy them or sell them, your broker takes his commission. He’ll take it on big winners and big losers. He’ll take it on trades that breakeven. As long as he gets paid, that’s all that matters.

So what does he do? He tells you to buy blue chip companies — the large, established behemoths that can only go up or down a few dollars here or there. Why would you want to do that, because the broker says it’s a good idea, and he has made a bunch of money in the market, so he must be right. Wrong! Ignore those suits.

What about the penny stock enthusiasts? How did they strike it rich? Well for starters, they don’t listen to some commission-hungry broker. They find companies like our example above. You can’t get much smaller than nine cents a share. While that one was truly the best of the best — a top tier example — it’s not alone. Many others have done just as well.

You already know the list of names that started out as penny stocks: Wal-Mart, Starbucks, Microsoft, etc… But, those aren’t flukes either.

In a famous Tweedy, Browne report back in 1983, every publicly traded U.S. stock was grouped by size. As the size of the companies in each group gets larger, the returns are smaller. The smaller the company, the larger the return. Obviously, those who invest in small companies do quite well. You could say small-caps offer a higher reward than their larger counterparts.

Let me put it this way: If you want to continue to break even (at best) while your broker gets ever richer, that’s fine. But if you want to invest in a few penny stocks and hope one becomes the next Amgen, I’m with you.

Jim Nelson
The Penny Sleuth

Awhile back, I wrote a report about “Penny Retirement Stocks.” Basically, it detailed how you can collect income that will help you retire through dividend-paying penny stocks. Today, I’d like to dive back into that issue and give you a fresh look at income penny stocks.

First, let’s break down exactly what I’m talking about…

Penny stocks offer the largest potential of capital gains. I’ve said this before, but it’s so true: It’s much easier for a $50 million company to turn into a $100 million one, than it is for a $50 billion company to turn into a $100 billion one. But on top of capital gains like this, you can also enjoy the same benefits that the blue chips provide…namely, dividends. I’ll show you how…

Turn $5K into $151,025.76 in Just Five Years

The year was 2003. Fertilizer maker Terra Nitrogen Company (TNH: NYSE) paid a small dividend about 4-5% of its share price, which was only $4.40. Nothing to write home about. But, it was picking up steam.

Just $5,000 would have bought you 1,136 shares. But starting the next year, the company took off. The demand for its products grew sky high, and so did the company’s dividend plan. Those 1,136 shares would have been paid off through the company’s dividends in just two and a half years.

So you would have had free shares of a growing company that pays a tremendous dividend. But here’s where the story gets good. Over the next two and a half years, the company absolutely soared. You would have received dividend checks totaling $20,686.56 with just a $5,000 initial investment a few years before. And it’s still paying dividends to this day.

On top of this, the company’s share price skyrocketed. Shares of Terra Nitrogen went from trading at less than $5 to $110 today. That’s a 2,400% capital gain, which is a complete bonus. After just $5,000 upfront five years ago, you’d be sitting on $151,025.76 right now:

That’s great, but how do you look for this kind of thing? Well, that’s the hard part.

Finding the Best Penny Income Plays

One way to go about it is to start with a simple stock screen. A couple of key items to screen for would be dividend yields, dividend growth, cash flow, and debt. Here’s how that works…

Obviously, the company needs to pay a dividend for it to be an “income” play. While most people will tell you that you need to find high dividend yielding stocks, I disagree. The growth is the only thing that matters. I look for yields around 3%-6% — solid but not too large — and dividend growth over 5%-10% per year. This gives a strong dividend position.

Second, you’ll have to make sure the company is making enough to continue to payout dividends. If the company is just piling on debt to appease income investors, forget it. That’s robbing Peter to pay Paul. You don’t need that. That’s why you have to look at the company’s income and current debt levels.

Once you narrow that search down, you can plug in any other criteria you might have, like a share price under $10 or a market cap under $1.5 billion — to make sure you are only looking at penny stocks.

Once you find a few company’s to look at, you’ll need a checklist to determine if these companies are actually worth buying:

1. Does the company have plenty of cash on hand?
2. Is the company’s operating cash flow minus capital expenses sufficient for future dividend payments? (Three times current dividend is a safe bet.)
3. Is the company’s business safe from competition?
4. Is the company’s product or service recession proof?
5. Would you be willing to sink an investment in this company and leave it for a few years?

If you answer yes to these questions, you might have found a winner…

Lastly — and most importantly — you’ll need to look at the company’s future prospects. If a company isn’t going to grow much more, or bring in any more income than it did in the past, there’s no way it can grow its dividend without maxing out at some point. You must make sure the company and its industry are on track to continue to grow.

Take the Terra Nitrogen example again… If you had predicted the ethanol boom coming, you would have been able to spot the need for fertilizer. After all, it takes a ton of fertilizer to grow corn. Foresight like that, even if it’s just a few times, can leave an average investor with a large retirement account, along with big dividend checks for life.

While we continue to scour the penny stock market, we’ll keep you informed if any penny income plays pop up. That just might be your best bet to grow your retirement with just a few bucks…

Jim Nelson
The Penny Sleuth

Don’t ever judge a book by its cover. Chances are…it’s a good book. Otherwise it would have never been published. The same goes for penny stocks…

There are several accusations about penny stocks that can make an investor hesitant and timid to invest because of a “risky no-gainer gamble” stereotype. These statements are exaggerated and erroneous…

Learning the truth about what you heard in the past…might be a wealthy opportunity for the future…

Here is the top three…

Misconception #1: Penny stocks are priced low because they are poor performing companies.

Penny stocks are usually small and newly created companies. While still trying to get established, penny stocks are analogically infants and toddlers compared to large-cap adult companies. With great parental guidance from a superb managing team, penny stocks can hold a promising future.

Hints: Do your research! Get background information. There may not be an abundance of information on the company because of lack of media attention. So research patiently and vigilantly.

Check if the managing executives and board members are respectable and passionate towards the company. A positive staff is always going to produce great work and show that through the company’s bottom line.

Make sure the company is in a growth position and if they are compatible with future trends and markets. A company’s willingness and desire to expand is a good indication of the value of a company to potentially rise.

Another good way to analyze a company is by reviewing a company’s financial reports and accounting sheets. 10-K annual reports are a great source to attain information. Comparing and analyzing numbers throughout the years will show the “guts” of a company that you won’t read or hear about in the news. However this process can be challenging…

In compliance with SEC rules, companies have to report their financial records. Inside executives know that these records are easily accessible and can show the value and worth of the company. As a loophole, firms will try format the reports differently every year to make the evaluation more difficult and tedious to analyze.

Misconception #2: Penny stocks are all frauds.

Some investors have fallen victim to the “pump and dump” scheme — a system where spammers will buy a stock and then hype it up by sending out positive e-mails and internet ads causing the price of the stock to jump. While the price is up, spammers will sell at a net gain, causing the price to fall, leaving their victimized investors holding the bag.

Hints: Go back to the basics. One of the primary rules to investing…never…ever…invest on tips and rumors. Chances are, your source is wrong or you’ll get in too late…

Do your research! Make sure you know what you are investing in. Make sure your sources are honest and ethical and act upon the interests of its investors and clients. Tips are only ideas. Investments should only be made on your own personal conclusions.

Misconception #3: Penny stocks will usually generate a net loss.

Every stock bares risk. Whether they are priced from $0.01 to $1,000, or a microcap or a large-cap company. Barriers to entry and competition are high these days… Since a majority of penny stocks are young and small companies, its common for penny stocks to default under a competitive market.

In fact, penny stocks are one of the fastest and easiest ways to make double or even triple your money. It’s a whole lot easier for a $2 stock to jump to $4 than a $60 to $120.

Hints: Do your research! Are you starting to see a pattern here? Make sure the industry sector of the company is compatible for future market trends. Analyze the company by generating different scenarios. For example… Would the company be affected by high oil prices? Is their innovative product going to be the high in demand? How would they perform in a recession?

Generally, the more risk you have, the higher the yields can be. If you enjoy risk and want to make big-time returns, by all means go ahead and invest irrationally. But if you are risk-adverse, go back to the basics and diversify your portfolio.

There you have it, three truths to investing…

These common misconceptions are the response to investor’s bitterness of poorly managed securities. For what it’s worth, that’s up to you. But with sufficient research and a promising future market, penny stocks can yield gains far greater than you could have imagined…

Mark Louie
The Penny Sleuth

In 1936, one smart six-year-old purchased a few six-packs of Coca Cola from his grandfather’s grocery story for a quarter per pack and resold each bottle for a nickel apiece. With that initial 20% profit he made of each six-pack, the world’s richest man got his start in business.

Today, that same man owns $12.2 billion worth of the Coca Cola Co. Obviously, I’m talking about Warren Buffet…

Everyone already knows all there is to know about him, or so they think…

Sure, we know that he went to Columbia to study under Benjamin Graham. And, that he’s one of the largest owners in many of the brand names we enjoy everyday, General Electric, Anheuser Busch, Bank of America, and of course, Coca Cola. He’s also the wealthiest man in the world, totaling $62 billion.

But there is something that only a handful of people know, He wants to be poor again.

That’s right! Back in 1999, he told BusinessWeek “…it’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

The reason for his guarantee is simple: The best opportunities in the world are in small-caps. If you have a tiny company worth 50 cents per share, it’s a lot easier for it to go to $1, as opposed to a $50 one going to $100. But that’s not the only reason Buffett loves small-caps.
He also discusses his affinity for finding little nuances in companies that other investors don’t see right away. In a 2005 Kansas University interview, Buffett elaborates, “You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map, way off the map. You may find local companies that have nothing wrong with them at all.”

You can’t do that with big blue chips…

If a small company has a hidden asset that investors haven’t picked up on yet, it would take some work, but you could find it and make big money off of it. Finding a large company with a hidden asset is exponentially tougher.

There are a thousand reasons why smaller companies offer more potential, but at the end of the day, it comes down to one thing. How much more money can I make with small-caps.

Let’s take a look at two charts for a minute:

The top one is Berkshire Hathaway, Buffett’s investment vehicle, from 1977 to 1992. The bottom one is Berkshire from 1992 to 2007.

Upon quick glance, they both look pretty good. In fact, they look nearly identical except the spike at the end of the century, which happened in nearly every single stock traded at the time.

But if you look closer there is a big difference between the two charts. Notice how in the first one, Buffett brought investors gains of 10,000%, and in the second, he only brought a 1,200% gain. Now, I know that still sounds pretty darn good (which it is), but the question remains, why did he do so much better in the first 15-year period of Berkshire than the second 15-year period? The answer is small-caps…

You see, back in 1977, Berkshire was a much smaller company, with a lot less money to invest. So, Buffett was able to invest in smaller companies at the time, including American Express, Disney, and the Washington Post Company. Those companies were able to grow much faster than the ones Buffett is restricted to now. Now, Buffett has to look at companies worth tens of billions of dollars. In ‘77, he could look at companies worth just a few hundred million dollars.

But to do even better than Buffett, your only chance is to look for companies even smaller. I’m talking companies flying way under the radar. Companies in the tens of millions of dollar range. Simply put, buy penny stocks because Warren Buffett can’t.

Jim Nelson
The Penny Sleuth

If a penny-stock trader made a killing on a few penny-stock trades, there’s a good chance he or she orchestrated a “pump-and-dump” scam – where a holder of a big block of penny-stock shares orchestrates a big whisper campaign to pump up the price of his shares. Traders rush in, driving the price skyward, enabling the perpetrator to “dump” his shares at a big profit.

The big sales, combined with the end of the hype, usually cause the penny stock to nosedive, inflicting the greatest damage on those who bought in last.

Story continues below…

Sign up right now, and we’ll send you an important new report for free: “The Three Best Investments in Asia.”

Thus, if a penny-stock trader lost a ton of money trading in the low-priced shares, there’s a very good chance they were among the victims of a pump-and-dump campaign.

The Stock Market’s Wild West?

Naturally, these aren’t the only ways that penny-stock trades work out, but they are the two most prevalent plotlines that play out daily on the largely unregulated OTC Bulletin Board, and the Pink Sheets Electronic Quotation Service, the finance-sector’s Wild West where investors must make due with little information on the companies themselves and even less explanation for the wild price shifts that can ensue.

Despite the risks, there’s an allure to penny stocks that makes them impossible for some investors to resist. So-called “pennies” get their name from their low price – they typically trade for less than $5 a share (though many trade for true pennies, which share prices well under a dollar). Most are also “thinly traded,” although some boast volumes in the hundreds of millions per day.

So, if you’ve ever actually notched a profit from a penny stock play, author and journalist Robert L. Frick considers you one of the rare lucky ones.

“If you make money on a penny stock, my advice is immediately sell half. Make a profit because few people walk off with a profit,” Frick said. “That’s the smart way, if there is a smart way.”

Over the course of his career, Frick has chronicled the penny stock culture, and won several awards for his journalistic investigations of the scams and scammers. He’s also penned a handful of books, one being Barron’s “Keys to Risks and Rewards of Penny Stocks.” So he knows all the tricks of the trade.

Now a senior editor at Kiplinger’s Personal Finance, Frick recently ran his eyes over an article, “The Truth Behind Penny Stock Spam,” which reveals how prevalent and effective penny stock scammers are, and how helpless the U.S. Securities and Exchange Commission is to stop them – especially in the digital age.

But before getting too deep into the seamy underbelly of the penny stock world, let’s take a broader look at the topic at large.

Why They’re So Cheap

The SEC generally defines penny stocks as speculative securities from small companies, most of which trade on the OTC bulletin board and Pink Sheets, which have both have minimal listing requirements.

Penny stocks have much fewer shareholders than a typical SEC-regulated stock, and their lack of liquidity makes it much easier for the share price to spike, or plunge, with a major shift in trading.

For example, a gain of just six cents for a 30-cent stock means a 20% jump in valuation, whereas a six-cent gain for any stock trading on the New York Stock Exchange would be hardly noticeable.

Investors are lured to penny stocks because of their low entry prices – which makes it easier to amass a major “position” – and the perception of a much-greater upside potential.

But what many typically ignore is that the odds of a real killing are slim indeed.

Investors fixate on the hope that their $2,000 investment will blossom into $200,000 in a few weeks.

“That’s not investing, in my opinion,” Frick said. “Those are momentum plays on hype.”

Policing Penny Stocks

The SEC estimates that 100 million stock spam e-mails are sent every day, according to Kiplinger’s.

In addition to the volume, spammers are creating more efficient ways to target potential victims, such as creating an e-mail format that sneaks under the radar of spam-preventive software.

“There’s a lot the SEC should be doing, but they have a limited budget and [tend to focus on] the big guys,” Frick said. “They don’t have time to deal with all the cockroaches in the room.”

Of the 4,800 stocks that trade on the Pink Sheets, about 10% of them are spam targets because of their lack of submitted financial information, Pink Sheets Chief Executive Cromwell Coulson told Kiplinger’s.

And the United States isn’t the only place where regulators face this problem.

The Bombay Stock Exchange recently clamped down on hundreds of brokers accused of manipulating the stock prices of KGN Industries and Sylph Technologies. Sylph’s stock surged ahead 100,000% intra-day on May 22.

After being a haven for “pump-and-dump” schemers, Canada overhauled its regulations to require executives and promoters of small-company stocks to undergo background checks and register their promotional efforts, Kiplinger’s reported.

Investor Safety

Frick’s first piece of advice concerning penny stocks is straightforward: “Don’t do it. Absolutely, don’t it.”

But he knows he can’t convince everybody, so he also gave some concessionary tips.

First, remove the dollar signs in front of your eyes and replace them with company research. Start by looking for companies with financial track records, an important screen that eliminates 95% of the companies out there, Frick said.

“It’s still a big risk but at least you know your not being ripped off,” Frick said.

Second, apportion only a small amount of money for penny-stock investing. That means that you can’t clutter your mind with a lot of “what if” long-shots – such as, “what if this stock soars…I’d be able to buy a vacation home/finally purchase that collector car/retire rich by 49.”

That kind of financial sobriety sounds boring, but sobriety today means there’s no hangover tomorrow – especially since penny-stock scammers prey on investors’ long-shot dreams.

Third, if you’re lucky enough to pocket a double-digit gain, don’t waste time celebrating or hoping for more. Sell at least half your holdings – if not all – and get out before you give everything back. And by “everything,” we’re also including your original investment.

Cautions Frick: “You have to ask yourself: Why are you in this area? Are you looking to make a killing? If so, there are predators dangling outrageous offers that don’t exist.”

By Mike Caggeso
Money Morning

Pink sheets are companies that are traded over-the-counter and that aren’t part of any major stock exchange. But that doesn’t mean they are any less valuable than traditional stocks, exchange-traded funds (ETFs) or mutual funds.

In fact, expanding your portfolio with pink sheet companies can be extremely lucrative, but you have to make the right moves to rake in the big profits.

Let me explain…

Pink Sheet Basics

Pink sheets began as listings on an electronic database provided by Pink Sheets LLC, and are so called because the quotes were originally printed on pink sheets of paper.

Companies that are involved in this kind of over-the-counter trading fall just outside of the many regulations that restrict the activities of the major stock exchanges. That means they don’t adhere to many of the time-consuming accounting and finance regulations of the U.S. Securities and Exchange Commission or the National Association of Securities Dealers (NASD), which helps the companies run more efficiently.

Also, some companies list in the pink sheets as a first step to getting listed on a bigger exchange. And that alone can result in some price appreciation, as it may attract buyers that were previously wary.

However, first be advised that a transparency can also leave investors in the dark. These companies do not have to disclose as much about their business, and there is no one knocking on their door asking to see their figures.

Of course, that does not mean they are something to be completely avoided. The fact that companies in the pink sheets are not regulated by any major institutions can be nerve-racking to some, but it is overly cautious to think of this kind of trading as the “Wild Wild West” of the financial world. Keep in mind that fraudulent misrepresentation of financials is a Federal offense.

Also, in the past year, Pink Sheets LLC created a new classification system to help investors assess the legitimacy of the companies in their roster. These classifications range from the highest, “PremierOX” – which are priced at least $1 per share and meet the requirements of the major exchanges – to the lowest, “Caveat Emptor” (literally “let the buyer beware” in Latin). The complete hierarchy can be found here at the Pink Sheets Web site.

The problem with these stocks is simply that they are not badgered by any institutions to provide financial data on a regular basis. Instead, a wise investor who knows not to jump into shallow waters headfirst must approach them.

Despite not being obligated to, some of these companies still offer limited information on the Pink Sheets Web site. This information can be very useful to draw on as you research companies you’re interested in.

The next step is to request information directly from any company you might be interested in buying. Whether by phone or email, get in touch with the company and find out any information they can send you, whether it be about their finances, their products or even the state they believe their nation to be in (as many of these companies are overseas). Risk assessments, future opportunities – anything you need to know to be sure of a company’s potential.

As a side note, some of these companies may not be very forthcoming with their information, and have even been reported to be hostile with researchers. Be wary of companies that will not consider treating the interests of their minority shareholders as their own.

Buy and Hold

Once you have thoroughly researched your stock of choice and purchased it through your broker or online, be prepared to treat it as a long-term investment. Because these stocks are smaller companies and are not constantly watched by analysts and regulators, they can sometimes go days without even a single share changing hands.

This will no doubt make some of the nail-biters out there anxious, because they won’t be able to check their favorite stock at every smoke break, but most intelligent investors find it liberating to be able to ignore the roller-coaster ride that is the short-term market and focus on growth potential over the course of a company’s natural life.

Now that we’ve given you the know-how to get started with pink sheet stocks, take the time to explore and research them carefully before you buy. And make sure you’re prepared before you decide on a purchase.

By Steve Waters
Money Morning

Many people who have never played the stock market game before start with penny stocks. Heck, even if you’ve been around investing for decades, penny stocks are still your ticket to triple-, quadruple- or even quintuple-digit gains. You just can’t see those if you bet on the Dow.

The problem is penny stocks are a bit more difficult to research than their large blue chip cousins. To make this a bit simpler for first-time investors, here are the top ten things to keep in mind when looking for solid penny stock plays:

10. Think Outside the Box

When it comes to penny stocks, some of the wackiest ideas have translated into serious gains for investors who were willing to think outside the box…

Back in the day, who would’ve thought that computers were the “wave of the future”? Early investors in companies like Microsoft and Yahoo, that’s who! They made a bundle by thinking outside the box and betting on business models and technologies that were out of the ordinary.

There are new technologies and business models out there in the penny stock world today. Are you willing to think outside the box on your next penny investment?

9. Know What You Own

In the world of Wall Street, whether you’re investing in penny stocks or blue chips, one of the biggest rules is to “know what you own.” What does that mean?

You should know the company you’re investing in inside and out. Know its business. Know how it makes money. Know its management.

But as important as this rule is for any investor, it’s doubly important for investors in penny stocks! That’s because with penny stocks, share prices can change quickly if you don’t keep a handle on them.

So know what you own and your investments won’t end up owning you.

8. Don’t Get in Over Your Head

When you see a hot penny stock that’s ready to take off, it can be hard to keep from cashing out your 401(k) to buy as many shares as you can…getting in over your head with penny stocks is an almost sure way to get burned.

Even though penny stocks can make you some serious money, they’re volatile — and that means you shouldn’t put more than 10% of your portfolio on the line.

What’s the smart penny investor to do? Set up an account for just penny stocks and load it only with money you’re prepared to lose.

7. Don’t Be Afraid to Ask…

One of the beauties of penny stocks is the fact that they’re smaller companies that are out there for smaller investors.

As an individual investor, a big multinational might not give you the time of day. That’s usually not the case with penny stocks. In fact, it’s not unheard-of for individual investors to pick up the phone and chat with a company’s CEO or CFO on the spot.

If you’ve got a burning question about a penny stock prospect, e-mailing or calling the company’s investment relations firm or corporate offices might be one of the most telling ways to figure out if that stock’s for you.

6. Be a Skeptic

Remember when we said to think outside the box? Well, do that, but don’t forget to be a skeptic…

Just because a company has an interesting new idea doesn’t necessarily mean it’s a good prospect for your portfolio. The key is…Do you think that it can monetize its idea?

If that answer isn’t immediately clear, it’s time to dig a little deeper into that company’s prospects. Thinking outside the box is a great way to get innovative companies on your radar, but being a skeptic is the only way to make sure that translates into gains for your portfolio.

5. Think, Then Buy

When you’re ready to buy shares of a penny stock, make sure you take a second to think about what you’re doing. All too many first-time penny investors take the jump on just a few shares of a penny stock without realizing how much the size of their investment will affect their returns.

Think about it this way… You’re an investor who sees an attractive stock for $1 per share. You don’t have a large portfolio yet, and you don’t want to take too much of a risk, so you buy just 50 shares for $50.

Turns out you picked a winner that made 40% in just a week — $20 of pure profit. You sell and rejoice in your penny stock success. But wait…is that celebration justified?

You’re forgetting about those $10 execution fees you paid to buy and sell that stock. That’s $20 altogether. Looks like you only broke even, despite the fact that you had a stellar stock.

When you’re buying penny stocks, make sure you’re buying a large enough quantity that account costs (like execution fees) don’t eat up your profits. You can find out your minimum returns to break even with this:

Execution Fees/Stock Acquisition Price x 100 = Break-even Gain (Percent) Needed

4. Don’t Get Greedy

Lots of penny stock investors see 200%, 500%, even 1,000% gains on a stock but still end up losing money in the end. It’s not because they didn’t plan their buys properly…it’s because they got greedy!

It doesn’t matter how much money a stock makes if you’re not ready to press the button and realize those gains. That’s why you need to set solid exit points for any penny stock you buy.

It’s human nature to want to hold onto an investment as you see it climb with no end in sight, but doing that is a great way to miss out if that trend turns around. When you analyze an investment, think about a logical exit price and sell for that. Picking solid exit points will become easier as you develop your investing chops.

3. Don’t Get Too Nervous

The flip side of getting greedy is getting nervous with stocks that are seeing major gains in short periods of time. Relax. As a penny stock investor, you’ve got to be ice-cold when you see one of your picks take off.

Again, it comes down to picking good exit points for your investments. If you’re sure that your stock is bound to start losing ground before you hit that target price, maybe it’s time to re-evaluate what that price should be.

Remember, you can reanalyze your targets anytime, but you should never make trades on emotion alone.

2. Be Realistic

While investors might hope for tripe-digit gains on every pick they make, even the most seasoned pros of the investing world make bad picks from time to time. That’s why having realistic expectations is so critical.

As with picking the right target prices, knowing what kind of gains to expect comes with experience as a penny investor. It’s tricky to know when you should expect 20% from a stock and when you should expect 200%.

But setting those realistic expectations now, from the get-go, will get you into a habit that will help you structure your portfolio in a way that will get you the most bang for your investment buck.

1. Be Ready for the Next One

It’s easy to sit back and relax after you’ve just made a trade — especially if you banked a nice gain. But not so fast!

As much as you might want to bask in your investing success, fight that urge.

The secret to the penny stock game is to always be on the move. Always be on the lookout for that next penny powerhouse — the next one might just be your best yet.

Jonas Elmerraji
The Penny Sleuth

You see, before 1990 the over-the-counter securities market was a wild-west show. Not complete lawlessness, but close to it. So that year, the SEC started the Over The Counter Bulletin Board as part of the Penny Stock Reform Act. The OTCBB’s main purpose was to bring more quotation and last-sale information. By 1999, the OTCBB had evolved to the point where every company had to report regular financial information. This sets it apart from others, specifically the Pink Sheets, which don’t have reporting requirements.

There are absolutely no requirements for Pink Sheet companies. They don’t have to file regular and current financial information (although a recent classification system is slowly changing that), they don’t have a strict minimum market cap requirement, and they certainly don’t have to pay the couple hundred thousand dollars just to be traded on a major exchange.

The OTCBB, on the other hand, is a much stricter form of the Pink Sheets. Over the Counter Bulletin Board companies have to keep up with regular financial reporting. This truly makes all the difference in the world.

Here’s an example:

Company A is traded through the Pink Sheets, and Company B is on the OTCBB. Both companies issue press releases claiming to be “transitioning their businesses”. Company A really just slumps into a shell company state, because no one has to know what’s actually going on over there. Whereas Company B has to file regular quarterly earnings. If it doesn’t the OTCBB will add a dunce cap (or in this case the letter “E” to the end of the company’s ticker), which immediately tells investors that the company isn’t showing enough corporate responsibility. This can make or break that investment. People invested in Company A are out of luck. Company B investors can get out before the going gets too tough.

But, that doesn’t explain why OTC companies are even worth investing in. There are two reasons to get involved in the OTC market…

The main reason most OTCBB investors keep trading these securities is the profit potential. Obviously, a $300 billion Blue Chip can’t double in size too easily. That doesn’t give investors too much to work with. A $3 million company can double in size overnight without flinching. Which would you rather have in your portfolio?

The second reason is also a pretty clear one. Because many of these tiny companies are working on a much smaller scale, overall general market attitude has a very small effect on them. There are almost never any big institutional investors or large mutual fund managers pulling money in and out of these companies. These two groups of investors are more interested in macro market sentiments than what individual companies are doing. So, in bear markets, it’s quite possible to have a bunch of these OTCBB companies take off.

In a 2001 study published in the Journal of Alternative Investments, a four –year period of Over the Counter Bulletin Board trading was studied for a risk to return ratio. The interesting conclusion they came up with was that OTCBB stocks didn’t reflect what the general market was doing at that time. There were some years of extreme bullish overall sentiment, which can be defined as a solid return on the S&P, and the overall OTCBB market lost a lot of money. On the flip side of that, years of extreme bearishness in the S&P, along with the major exchanges, showed positive returns for many OTCBB companies.

So whether you are a safe-bet kind of investor or a fly-by-the-seat-of-your-pants type, there is still a place for you, just off the major exchanges.

Jim Nelson
The Penny Sleuth