Playing the penny stock market?

[Earthworm Jim]

I have a little extra cash, thanks to my employer I have an account with etrade, and I like to gamble. Needless to say, the idea of betting on some penny stocks appeals to me. Risky, but potentially rewarding.

I'm looking for some tips on getting started. How do I find the stocks trading for (say) under $2.00? How do I go about researching those companies? What are some signals that the stock will go up, what are some red flags?

I'm not looking for a get-rich-quick scheme. Sure, I'd like to make money. But, as my grandfather liked to say, "Every gambler's a loser."

[Trunk]

I have a little extra cash, thanks to my employer I have an account with etrade, and I like to gamble. Needless to say, the idea of betting on some penny stocks appeals to me. Risky, but potentially rewarding.

I'm looking for some tips on getting started. How do I find the stocks trading for (say) under $2.00?
Check the spam folder of your email program EVERY SINGLE MINUTE.

If you google penny stocks, you'll find a million places to talk about them.

If you're looking for solid, legitimate analysis and discussion of penny stocks, you're probably not going to find it. They're penny stocks for a reason. They're also sometimes traded on the pink sheets, and off the boards, so transaction costs are murder and regulation can be suspect.

Seriously, I'd rather spend the dough on sports betting or something. At least you have an idea what's going on.

[dalej42]

I don't advise it. However, you might start with pinksheets.com (http://www.pinksheets.com/index.jsp) . Also, see what commission your brokerage firm charges for these types of security purchases.

Here (http://www.otcbb.com/) is the web page for the Over the Counter Bulletin Boards stocks.


I'd stay far, far away from anything you get as email spam with "hot stock" picks. Those are usually some sort of pump and dump scam.

[guppy]

Why buy failed companies?

Not a good place to put your money for any reason if you ask me. I would start with this (http://en.wikipedia.org/wiki/Penny_stock) and then check the SEC (http://www.sec.gov) website if you still aren't convinced not to.

[Earthworm Jim]

Hmmm...from the wiki link -A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there are no buyers that day.

Very well then. I'll invest my money in more wholesome puruits, like poker night, the track, and the lotto.

Thanks for saving me from myself!

[RealityChuck]

Good choice. Brokers are required to do everything they can to discourage clients from buying penny stocks, and pushing a penny stock to a customer who hasn't traded them in the past can cause them to lose their licenses.

It sounds good -- "The stock is at $1, so if it goes to $2, I'll double my money" -- but there's a good reason why the stock is so cheap, and the price is manipulatable by scammers. Unless you have money to piss away, stay away.

[Trunk]

Hmmm...from the wiki link -

Very well then. I'll invest my money in more wholesome puruits, like poker night, the track, and the lotto.

Thanks for saving me from myself!
Seriously, if you took $1000 and just placed random bets at the track, and took $1000 and just bought random penny stocks (and paid the associated fees), I'd be willing to bet that after a year, you'd have more money in the horse track account.

[dalej42]

Good choice. Brokers are required to do everything they can to discourage clients from buying penny stocks, and pushing a penny stock to a customer who hasn't traded them in the past can cause them to lose their licenses.

However, penny stock rules do not apply to non-solicitated transactions. If the client places an order on line for a penny stock, the broker-dealer can execute the order. I'm not sure about e-trade's web site, but there is probably a link on there with a disclaimer about the risks of these type of securities.

[ParentalAdvisory]

If you're looking for solid, legitimate analysis and discussion of penny stocks, you're probably not going to find it.


http://www.hotstockmarket.com/forums/

[Trunk]

http://www.hotstockmarket.com/forums/
Can you add some context to the link?

Are you trying to support what I was saying with a link to a board called, "hotstockmarket.com" and a forum entitled, "Hot Penny Picks, Momentum Stock Picks & More!"?

[dalej42]

Looks like a typical rumor mill board, filled with sock puppets who talk up a stock so they can dump what they own.

[NurseCarmen]

I actually did okay with penny stocks for a while. Until I hit one that the broker basicly refused to sell, and it dropped and dropped and dropped. So 6 months of pretty good luck got eaten up and more by a shady broker. In my experience, avoid the penny stocks. NASDAQ stocks in the 2-3 $ with either an even history or slight incline ended up making me much happier.

[Merhouse]

In the same vein as most of the other (well informed) responses, I was going to suggest seeing if you could actually get the physical stock certificate for any penny stock you bought, and if so, buy the one you think is most attractive. It's likely the majority of its value would be as an object d'art on your wall.

IOW, if you're going to gamble, find a casino ;)

Good luck!

[Lamar Mundane]

If you just want to take a flyer, CV Technologies (http://www.stockhouse.com/comp_info.asp?symbol=CVQ&table=list) is a Canadian company that has a pretty good track record.

I do not currently own this stock, but I have several times in the past, and made good money on it. Their primary product is a cold remedy that sells really well in Canada, and is endorsed by a number of big name hockey types.

Positives - We are coming up on flu season, and this coming quarter is usually their best. Last year's flu season was mild so sales were down, which could mean good comparisons quarter over quarter.
They are also launching distribution into the US very soon.

Negatives - It has been on a pretty good run of late, and selloffs happen pretty rapidly with this company.
It can be hard to find a broker for this if you are in the US. I don't think ETrade will get it for you.

Note: I am neither endorsing the product or advising you to buy it. I just am relating a sucess story I had.

[dalej42]

It can be hard to find a broker for this if you are in the US. I don't think ETrade will get it for you.

It trades over the counter in the US under symbol CVTHF


I still don't recommend penny stocks.

[RealityChuck]

However, penny stock rules do not apply to non-solicitated transactions. If the client places an order on line for a penny stock, the broker-dealer can execute the order. I'm not sure about e-trade's web site, but there is probably a link on there with a disclaimer about the risks of these type of securities.True, but they're supposed to hand over a bunch of documentation filled with warnings -- more than just a disclaimer, but a document that points out all the disadvantages -- and have the buyer sign it.

Here is an online version. (http://www.speedtrader.com/pennystocks.php) Note the second paragraph: it's clear and concise.

[Rysdad]

You could even buy stock in a major airline. (http://quotes.nasdaq.com/quote.dll?page=charting&mode=basics&symbol=NWACQ&selected=NWACQ)

I'm not sayin'; I'm just sayin'.

[dalej42]

Delta Airlines, DALRQ, also trades over the counter now.

[dalej42]

Delta Airlines, DALRQ, also trades over the counter now.

[Frank]

[old joke]
Q. How do you get a small fortune in penny stocks?

A. Start with a large fortune.
[/old joke]

[JohnT]

Not a bad strategy if you have guts of steel and solid analyst skills, I've made some killings on "Fallen Angel" stocks including K-Mart, Texaco (my first FA buy, when it crashed after the Pennzoil ruling) and LTV, but I've lost some in crap like Enron (I bought a thousand shares at around $3 the day before the Dynergy talks collapsed. After that, it was over: Never saw $3 grand just disappear like that in my life.)

You're essentially looking for unpopular* stocks with middlin'-to-strong fundamentals, companys that are suffering a temporary hit in their stock price because of a turn of the business/industry cycle, bad press, or negative affects of unusual items.

To find candidates for research is pretty easy - with the amount you want to invest, find a table of all NYSE stocks and their last closing prices, sort by price, look at the least-costly stocks and take note of all the names that surprise you for being that low. This should give you a list of 10+ stocks to look at. Companies that are coming out of bankruptcy reorgs are worth looking at as well.

Then download all their latest 10-k's, paying careful attention to statement of cash flows, unusual items, as well as the basic balance sheet/income statement info. If you find a company that is able to manage the downturn (that's where the cash flow statements come in) and has a number of one-time unusual items (especially lawsuits: a company that drops 60% because it just lost some $11 billion judgment is ripe for buying (just ask Texaco)).

Decide on one. If you do your analysis right (or you get lucky), you'll do well.

*Once you have some money, you can go for higher-priced unpopular stocks. Both Wal-Mart and Microsoft are languishing, though they're pumping out earnings like nobody's business. MS is particularly interesting because they're in a transition period, everybody knows they're in a transition period, and the stock has been sitting there, doing nothing for about 5 years now (http://moneycentral.msn.com/investor/charts/chartdl.asp?Symbol=MSFT&DateRangeForm=1&PT=1&CP=1&C5=10&C6=2001&C7=10&C8=2006&C9=0&ComparisonsForm=1&CB=1&CE=0&CompSyms=&DisplayForm=1&D5=0&D7=&D6=&D3=0&ShowChtBt=Refresh+Chart). Couple that with their large stock buyback program and there's no reason why it shouldn't be doing better... other than that it's not popular.

[JohnT]

Btw, "Fallen Angels" are not "penny stocks", but they're the closest to what you're looking for: very low-priced stocks that offers a decent shot of earning high-returns in companies that have plenty of analyzable data.

[Earthworm Jim]

Btw, "Fallen Angels" are not "penny stocks", but they're the closest to what you're looking for: very low-priced stocks that offers a decent shot of earning high-returns in companies that have plenty of analyzable data.
Thanks for the info. I figured 'penny stocks' included all cheap stock, but I guess the term has a specific (and not very nice!) meaning.

[ralph124c]

Isn't there a strong prejudice about all stocks that trade for less than $5.00/share? That's about junk status. I think corporate CFOs try to keep their stock from sliding this low-I recall LM Ericsson went below $5.00-and the company did a reverse split! yes, penny stocks can net you fantastic returns-but most of these companies sink like a rock! You can also buy firms that are in bankruptcy-but that's a real crapshoot! I also wonder about strong-earning firms like Microsoft, or Alcoa-nobody seems to have much interest in them.

[ultrafilter]

If you do your analysis right (or you get lucky), you'll do well.

It'd be a little more accurate to say "If you get lucky, you'll do well." Analysing the fundamentals may help you pick safe bets, but ultimately any single stock is a risky and unpredictable asset.

[JohnT]

It'd be a little more accurate to say "If you get lucky, you'll do well." Analysing the fundamentals may help you pick safe bets, but ultimately any single stock is a risky and unpredictable asset.

By default, of course. Even well-managed companies like GE or MS constantly risk becoming valueless due to forces beyond their control (or within: look at what happened to Enron or Barrons). And there's nothing in what I wrote that suggested you could "beat" the market every time.

However, with knowledge and experience, you can win more than you lose. And you do this by seeking out value (http://www.amazon.com/Intelligent-Investor-Collins-Business-Essentials/dp/0060555661) using many of the same principles found in the link.

"Fallen Angel" investing takes Graham one further in which you're looking for severe differentials between the breakup value of the company* and its market capitalization. It assumes that, at times, the market can be completely irrational in its valuations and value companies far below their true worth. It's different from "penny stock" investing in that you're looking for well-established corporations who have fallen in a bad patch, but one that can be righted.

With penny stocks, you're just taking a bet that the little company that fills the corner suite at that shiny new office complex down the road is going to take off - hell, it's worse than Vegas, because at least Vegas posts odds. There are 500 slots in the Fortune-500, but over 10,000,000 corporate entities in the US: those odds come to 1:20,000. Better than the lottery Super Jackpot, but far, far worse than blackjack.

*Not the only way that you can value a company, of course, but it's an example that easily understood even to the new investor: "breakup value" is what you are left with if you decide close up shop, sell the assets, and pay off the liabilities.

[JohnT]

Isn't there a strong prejudice about all stocks that trade for less than $5.00/share? That's about junk status. I think corporate CFOs try to keep their stock from sliding this low-I recall LM Ericsson went below $5.00-and the company did a reverse split! yes, penny stocks can net you fantastic returns-but most of these companies sink like a rock! You can also buy firms that are in bankruptcy-but that's a real crapshoot! I also wonder about strong-earning firms like Microsoft, or Alcoa-nobody seems to have much interest in them.

Corporate CEO's (of publicly traded companies) have a strong prejudice against any dip in the stock price - even if it's from $90 to $70. "Keeping the stock price up and growing" is, in fact, the major job task of the CEO.

You mention Ericsson. Not being a fan of foreign stocks I didn't take any of it, but even with a reverse split... you realize that the stock was down to $.50/share but closed today at $37? Even a 10:1 split would've netted you pretty well: $10,000 invested in Ericsson at its 2003 low would now be worth over $70,000 today.

Also, I meant companies emerging from bankruptcy, not necessarily in bankruptcy. Wait until the reorganization is over and signed off by all parties before thinking about buying that stock: last thing you want is to be recapitalized out of your position!