MORE Penny Stock Trading Advice I Give My Friends

| October 22, 2014

So last time I wrote about my friend Briana M. who asked for some advice on trading penny stocks. 

You can see that article right here:  Penny Stock Trading Advice I Give My Friends.

So I told her about keeping her money safe. 

I explained why you should never trust a stock tip from anyone (a friend, a family member, or even a stock guru). 

And I told her how profitable trading stocks could be… 

The example I used was my 700% + gain trading Primedia. 

And we were about to jump into the next logical question… how do we find more profitable penny stocks like that?!? 

The answer is simple… you’ve got to look at: 

  • the financials,
  • the management team,
  • the stock…
  • and learn to avoid the scams! 

So let’s jump in… 

My Penny Stock Trading Advice… Look at the Financials 

For me, before I buy any penny stock, I start with research… and the first stop for the research train is the company financial statements. 

Start by looking up the company filings at the SEC.gov website… 

Can’t find the filings… that’s a red flag. 

Find the filings, but they are woefully out of date… another red flag. 

(By the way, I hope you don’t need me to tell you “Red Flags” are bad!) 

Once you find a company with filings that are current, flip to the income statement… 

No or little revenue… another red flag…  

Are they losing money… another red flag… 

How’s the balance sheet? 

Zero or almost zero cash…. Red flag. 

Lots of liabilities and debts… red flag… 

Negative shareholders equity… another red flag. 

By the way, I pitch a penny stock to the waste bin if it has two or three red flags… and some red flags are bigger than others! 

This review alone will help you sidestep many (but not all) of the scams that unscrupulous traders and Pump & Dump artists are trying to pull.   

Once you find a great penny stock with decent financials, you want to start looking at trends… revenue trending down – RED Flag… earnings falling – RED FLAG… Cash disappearing… Red Flag. 

Ok… that should only take about 20 or 30 hours of research to find one company to go to the next level.

Remember, trading penny stocks is simple… but not easy… and you’ve got to put in the time. 

Once the financials look good, shift your focus to the management team… 

My Penny Stock Trading Advice… Look at the Management Team 

In the company filings, and probably on their website, you’ll see the management team bios… read them all.   

Google the people… see if they are reputable and upstanding. 

Have they been running small companies before?  Do they have a track record of success?  Is the team new… or have they been at it for a while? 

Then look at the ownership statements… 

These are known as form 4 filings… and it will tell you how much the management and directors own in a company… and it will also tell you if they are buying or selling stock. 

Management selling stock is a HUGE Red Flag. 

Finally, look at the press releases the management team is putting out.  If you see a ton of press releases all bunched together… that could be a red flag.  Are the press releases about important events… or do they seem to be trivial… another potential red flag. 

Or does management just NOT put out press releases… not good or bad… but  important to know! 

If the management team doesn’t pass these tests… start all over. 

If they look decent… or at least don’t scare the crap out of you… now you look at the stock. 

My Penny Stock Trading Advice… Look At The Stock 

When you look at the stock, start with the chart. 

Is there a long-term trend higher… that’s good. 

Or does the stock bounce around like a 2 year old main-lining sugar… that’s not always bad. 

Do you see unusual spikes in volume and price historically… followed by a collapse in price?  That’s a huge red flag.  It could be a sign of manipulation…  

If the stock is moving freely… and doesn’t look like it’s being manipulated, you can then look at some basic metrics… 

How does the stock compare to others in the industry?  Is the P/E too high or too low? What’s the Book Value like?  Is the Price to Book out of whack? 

Does the stock pay a dividend?  (That’s a great sign.)  Is the dividend inconsistent? (That’s a bad sign.) 

How many shares are outstanding?  A few million – that’s ok… a few hundred million or a billion or more… that means management has no idea what they’re doing.  It’s a red flag. 

After all this research… and after all this study… if you find a stock that looks solid… then and only then should you… 

Dive in and do your diligence on the company, the products, the customers, the business model, the technology, the patents and the long term industry macro trends.

With that research under your belt, you should be able to pick out some great little penny stock trades… 

But there’s one last thing to watch for… the scams. 

My Penny Stock Trading Advice… Avoid The Scams! 

Often times the scams are the easiest threats to detect… However, sometimes it can be hard to realize you’re caught up in one… 

For example, if you get an email touting a stock… look to see what the disclaimers say in the email… Were people paid money to tout the stock…Do they own the stock?  Are they planning on trading the stock while they advertise it? 

All of these things are legal to do… but only if disclosed…  

And if you see them disclosed… they are GLOWING red flags! 

But, what about a hot tip from your broker or brother-in-law? 

Don’t ask them if they invested… that doesn’t tell you anything about the company.  Remember… nothing says they can’t lose money too… you know the saying, “A fool and his money are soon parted.”   

Ask your friendly tipster where they got the idea… 

A lot of times it’s from an email sent by a stock pump & dump scammer! 

Another thing you can do to protect yourself is avoid any hot tip that says you’ve got to invest right now!   

Remember, my Primedia trade was a huge winner, but it took time… it was months and years before that trade reached its maximum value.  So if anyone tells you to invest right away… you should be very, very cautious!   

I hope that helps you better understand how to trade penny stocks… 

Profitably Yours, 

Penny Stock Research

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Category: Penny Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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