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Long-Term Penny Stock Investments are Tradable

For an experienced investor on the upper exchanges (NYSE, NASDAQ, AMEX), understanding how to invest on the lower exchanges of the OTC:BB and Pink Sheets takes a level of adjustment not uncommon to career changes. Too often an investor is brought into the lower exchanges by the tempting intrigue of higher returns. More than not, they carry the misconception that the factors analysts use on the upper exchanges are applicable in the lower exchanges. Yet down here, there is no compliance to industry averages, relative P/E multiples, or progressive indication through forward split notifications. Volatility exists because investor sentiment is both cautious and variable. The very trading system itself is often put into question (naked-shorting).

Therefore, a statement such as “long-term penny stock investments are tradable” ought not to be perceived as an oxymoron. Statistics will show you that investments held over the course of years often far exceed the profitability of short-term investors who habitually cash out at meager single profits. On the upper exchanges, I would tend to agree. On the lower exchanges, the additional risk would make this a foolish course of action. The hidden gems on lower exchanges will appreciate overtime, but they will also react on a consistent basis.

The concept of the game is simple. If one of your horses doubles up, consider dropping a half of your holdings. If it triples, consider retaining a third. If it quadruples, consider retaining a fourth. Etc. Learn to exercise patience. Do not feel obligated to recover your holdings right away once the profit’s been secured. Ideally, you will want to get back in and recover your holdings after a given amount of time. It is ill-advised that you reinvest your profits into the company, but rather make it your aim to recover what you sold & to retain those profits. Also, beware of becoming a day-trader. Realize that actual company progress must be the sole catalyst for your flip-trading tactics. Tangible company progress takes time. The following company is one of my favorite penny stock investments that illustrated a textbook scenario:

Industrial Nanotech

Notes:

Notice that while there were three very clear sell periods that ought to have been easy to spot by an investor who has followed the company’s stock, there was only one clear buy period. I state that this was a clear buy period because of the stiff resistance to break the floor. All other periods after the clear selling points were more volatile in nature, and offered little indication to get back in. Nevertheless, an investor that believes in the future of the company would have ventured to get back in during these time periods.

The Concept of Time

Whereas the stock market is fast-paced, the Penny Stock market is even more fast-paced. Less volume, smaller point levels, and more investing individuals (compared to large companies with influential capital) all contribute to the quick, volatile environment associated with the lower exchanges. Where a situation can change in hours over the upper exchanges, a parallel situation can drastically change on the Penny Stock market within minutes of an important press release. Nevertheless, it is important to not fall into the mold of a fast-paced day trader. You are not that good.

I use the term “day-trading” liberally, because to every person it means something else. Investors who conduct several trades a day will assume this identity just as much as the person who executes a few trades a week. Bear in mind that day-trading typically fails by the rule of probability (the same rule that controls how many times flipping a quarter will give you heads or tails). Its foundation is weak because it’s based upon sentiment rather than actual tangible company progress. What typically results to the investor is a bleeding through commission charges that ultimately has a person licking his wounds or standing meagerly ahead of where he started (except with a longer tax filing).

Penny stock investing should entail a rational degree of sensible patience. It should not have you trading tens to hundreds of companies, although it should have you researching just as many. Penny stock investing is about finding the hidden gems existent on the market and allowing for tangible company progress to vindicate the investment on the market. It is about finding the companies that slipped the radar of the heavy investors and patiently watch as they rise like a Phoenix. Time is your greatest ally, but for the typical penny stock investor, it is also the very foe he willingly fights.

In this game, there is no need to bleed through compiling commissions. It’s about finding your horse and feeding him with time so that he will do all the work for you. After fully researching a company, still expect a company or two to die along this race, but do not be surprised when the rewards of the remaining horses fully vindicate all expended efforts.

Personally, these are my five horses (in order) that I’ve taken under my wing to nurture:

1) PNMS – Panamersa Corp.

2) PBLS – Phoenix Associates Land Syndicate

3) INTK – Industrial Nanotech, Inc.

4) USSE – U.S. Sustainable Energy Corp.

5) AGWS – Advanced Growing Systems, Inc.

Do NOT invest in any of these without having undertaken a substantial amount of research. Do not believe that this list is by any means exhaustive. I personally have seen several more horses out there to run with.

Choosing Your Brokerage

Every brokerage comes with the notable perks and areas in which it falls short in comparison to other firms. Nevertheless, there are only a few big names out there that circulate with the reputation of being trustworthy to host your money while you navigate the rocky seas of the financial markets. Naturally, some of these companies are more ideal towards penny stock investing than others. Here is a short & non-comprehensive list of some of the well-known brokerages commonly heard within penny stock communities.

1) E*trade

2) TD Ameritrade

3) Scotttrade

4) Zecco

5) Charles Schwab

6) Fidelity

7) Merrill Lynch & Co.

8) Vanguard

The following advice is just based on my own personal experience and from here-say. An ideal brokerage for penny stocks is one that provides low-commission trading, with minimal (if any) fees attached to maintaining an account with the company. From the list above, I would be as strict as say that your best bet in meeting this criterion is to immediately cross off everyone but E*trade, Ameritrade, Scottrade & Zecco. While the other four brokerages are well-suited for investments, they are not as geared towards the fast-paced online investor that seeks low commission equity trades.

Out of these four brokerage firms that I listed, I would go as far as to highlight Scottrade & Zecco. Scottrade has a lower commission schedule when compared to Etrade & Ameritrade, decent realtime trading tools, and adequate customer support. On the other hand, Zecco has 40 no-commision trades per month (Zecco stands for Zero Commission), terrible realtime trading tools, and questionable customer support. Neither firms have fees attached to maintaining accounts with their firms.

When it comes down to it, there’s a level of risk and reward that comes even from choosing brokerage firms. If you go with the new firm Zecco, no-commision trades provide a level of trading flexibility that every investor dreams about. If you’re more into the safety and well-being of your financial investments, a firm like Fidelity will cost you high commissions but the comfort of being established and secure.

On a side, but important note, several companies have been blamed by fellow penny stock investors to restricting the trading of certain stocks. This often gives rise to the belief that the company is conducting naked shorting operations with these securities. Whether this is true or not is irrelevant for now. Ameritrade happens to be the most common case I’ve come across, having restricted the trading of several penny stocks I’ve been involved in. In my personal opinion, Scottrade is the cleanest in regards to these kinds of records.

I personally have active accounts open with E*trade, Scottrade, Zecco, Fidelity, and Vanguard.

The Funky Friday Rundown (8/24/07)

(Note: Every Friday, I am going to do a one-line commentary about the past week on some of the more popular penny stocks listed on Investors Hub. These are NOT recommendations. They are just some thoughts. )



1) Seaway Valley Capital Corporation (SWVC) -- Its nice to see this company's attempt in acquiring a decent brand-named business, but is it really going to make an impact to elevate this stock above the pink sheet gravity...? Is there really a future here? Where is there a true competitive edge that can effectively launch and sustain company growth? I just can't see it.

2) Xechem International, Inc. (XKEM) -- There might be some long-term potential here. It pains me to say this though, but bear in mind that there are reasons why companies tend to stay away from operating in Africa. Nevertheless, in the short- to medium-term, I'm not expecting much progress on the stock ticker until the facilities are fully operational and doing business.

3) Burn Media Ltd (BUNM) -- Long-Term prognosis is very hazy. Not exactly a revolutionary idea, but like many modern-day business ventures it could easily be turned into one overnight with a little tweaking. Might be interesting to keep an eye on, but I see nothing here that says buy at the current state of the company. If popularity soars, we'll have a different story. Don't hold your breath.

4) Eternal Image (ETIM) -- I like anything under $0.004. Going to have to wait a while for this one to take off.

5) Ifinix Corp (INXR) -- I think this one might spike again, but I'm staying out.

The Funky Friday Rundown (8/17/2007)

(Note: Every Friday [I do not post on Saturday or Sunday], I am going to do a one-line commentary about the past week on some of the more popular penny stocks listed on Investors Hub. These are NOT recommendations... just some thoughts. )

1) Global Diamond Exchange, Inc. (GBDX) – Interesting volume on today’s close. I like the likeliness of the company being turned private, but my caution bone is starting to tingle over the lack of the company’s transparency.

2) Phoenix Associates Land Syndicate (PBLS) – Verification from Komex needed, but clear sailing otherwise. In my opinion, the company was undervalued from both a current and long-term view even before the massive contract.

3) Ifinix Corp (INXR) – Yeup…. Might be an interesting short-term play, but I’m not seeing a bright future if a brokerage doesn’t adopt the software.

4) Esprit Financial Group Inc. (EFGO) – I’ll admit that I know little about this one, but there’s a very strong aura of desperation surrounding the company's focus. Personally, I haven’t seen anything that catches my eye for a sustainable long-term future.

5) Eternal Image Inc (ETIM) – Company’s trading sideways staying aloft in light of pink sheet gravity. I love the future of this company, the industry hasn’t been changed in tens if not hundreds of years.

Reverse Split Death

Contrary to popular belief, there is no such thing as a true bottomed-out share price. It’s almost a funny concept that those who trade on the upper exchanges believe that a share price of $0.01 (one penny) is the lowest a stock can go. Any penny stock investor (PSI) knows this to be a myth when they start venturing into the subpenny stocks. Yet it’s also a common mistake for those on the lower exchanges to believe that $0.0001 (one hundredth of a penny) is the lowest a stock’s share price can go. This is simply not true.

The value $0.0001 holds significance in the eye of penny stock investors because it is the lowest digit place that most brokerages will allow to be traded. Nevertheless even this can not be viewed as a practical bottom. Enter the dangers of the reverse split. A reverse split is an easy enough concept to understand: For every x amount of stock you own, you are now given y amount of stock (where X>Y) as the share structure is equally cut by a specified ratio. For instance, if you had 1000 shares of ACME Inc. that underwent a 1:10 reverse split, you will end up with 100 shares of ACME Inc. even though the value of those shares have not effectively been changed.

However, the dangers of this shifty maneuver are not in the action itself. A split of any kind will never change the inherent value of that stock (for all intensive purposes - we can talk about protected preferred shares another time). The dangers of this maneuver (aside from the affected shareholder sentiment that reacts to the announcement of a reverse split) is in the likely subsequent action of the company. A company that feels like it needs to reverse split typically has the intention of further diluting the stock once again in order to raise capital. Going back to our example of ACME Inc., pretend that the share price was originally $0.10. After the effective 1:10 split, the share price now becomes worth $1.00. This is a more respectable share price to the psychology of the shareholder despite the fact that the value of the stock has not inherently changed.

It is rare for a company to decide to reverse split its stock without having the intention of later diluting it. One possible reason in which this might take place is when a company needs to hit a certain price to retain its listing on a certain exchange. Another reason is that a company might merely want a more respectable share structure (a few million shares instead of a few hundred million shares). Yet for the most part, reverse splits are never as innocent as these scenarios. Often, these might even be used as the masking reasons behind the true intentions of the company.

Reverse splits are common on the lower exchanges. Many companies end up diluting there stock so much that the original price of the company’s stock may appear to have been worth hundreds if not thousands of dollars at one point in time. Typically, it’s a good idea to avoid companies that undertake reverse mergers entirely. Companies that are the product of a reverse merger (that might have included a reverse split) are a different story entirely. We will talk more about this another day.