Penny Stocks, the playground for the nuts

I am sure everyone has heard of penny stocks, or companies that are trading under $1 a share. Everyone has heard about success stories, great tales of investors making millions off these. After all, the more they go up, the more you make right? Well, what people may not know is that penny stocks are the riskiest type of trade you can do on the market today. Day trading is one thing, messing around with companies that are worth pennies is another. Furthermore, you can take it even one step further by putting your whole account on line. The most risk, the most reward, right? Well, this week I am going to attempt to pull of a big trade, which will make my account or could potentially put the 10k portfolio out of business for a while.

To give a perspective of how volatile these bad boys really are, I will try and give some examples of what I have seen and been through. The biggest run up I have ever been a part of was a 623% move in literally three days. Sadly, I did not run it for its whole move, but I did get 100% returns out of part of it. In one day I ran a stock for a 20% move, that one was sold out during food and cultures class in high school. I have ran a stock up to a 70% gain to see it come down in less than two weeks to a 20% loss; those are no fun. The worst I have ever been a part of was a 80% gain down to about about a 60% loss. You can loose your rear or be having a nice dinner celebrating a victory within a few days or even a few hours; but that's all part of the game with penny stocks.

What makes these stocks so price volatile? Well, first off there is no institutional or mutual fund ownership. Usually you will not see too much instituional representation until a stock passes $5 a share, but every stock is different. You also hold more shares for your money, so instead of buying maybe a few hundred or maybe a thousand you are buying now 10s of thousands. If someone decides to buy or sell big; it can usually move the stock. What is the strategy for buying these types of stocks? There are a few important things to look at and watch for:

1. Companies getting heavily shorted
2. Companies going under
3. Companies with very low avg daily volume.

What I am going to be looking for are companies that are:

1. Possibly undervalued
2. Trading as much as volume per day as possible
3. As big as possible (usually massive companies can hit quick downturns, and also quick upturns).
4. Are in a favorable technical pattern

Any advantage I can possibly have when taking a position I want, EOM. I am going to do searches for stocks under $1 a share avergaging at least 100,000 shares a day (which may not be enough) and that are in well performing industry groups. The market still isn't predictable or favorable right now which really isn't a positive but what can you do. When it comes to finding companies with "Great earnings growth, sales, etc" you can basically go try to find a needle in a haystack, because you probably won't find any. News is a huge factor that can swing one of these puppies one way or another, so I will also be looking for any speculative news coming out that could be big. I am going to try to stay away from companies that are indefinately going under for that's the last thing I want, is to loose everything. I have traded pretty low priced stocks before in the 10k portfolio, but this trade is going to set a new record (hopefully a memorable one, haha).

I will post later on what I find and my thinking behind the company. Check for some options later on. Have a great afternoon,