04.15
Readers,
I made an interesting discovery recently. I don’t recommend it for the faint of heart, but it’s more predictable and stable than day-trading. It’s a strategy for flipping penny stocks.
Usually, “flipping” makes people think of turning houses over, getting rich quick, or experiencing the latest pyramid scheme, but in this case, it’s actually quite healthy. It helps to re-instate the value of the security at hand, and it dramatically jump-starts your buying potential.
A standard was set many years ago stating that the lowest price any security in the US may sell for is 0.0001 cents. When I say US, I’m referring to specific US-based trading boards. These securities are usually considered to be severely undervalued, mostly worthless, and potentially fraudulent. It’s precisely these securities, however, that I sniff out for successful flips.
Fraudulent companies are a serious risk that any penny trader takes when investing. As long as an investor does his due diligence, there should be much less to worry about. Namely, call the company. Companies that operate out of garages are fine, but be sure that they know their business like the back of their hand. Ask some tough investor questions about their plans for the future, what they’re doing to achieve those goals, and get straight answers. If they can’t provide the answers without a sidestep here or there, they either have no passion for their company or they don’t have much of a company at all.
As always, anytime you get into a company, back the idea 100%. You’ve got to be behind what they’re doing. Otherwise, you’ll never be able to read the market scenario well enough to make any kind of prediction. If you’re loosing money, it’s because you don’t know what’s going on with the company or its market.
In the case of severely undervalued penny stocks, I look for good companies with great growth strategies, and products either very close to launch or in the early stages of launch. They also need a high average trading volume. Securities like this usually come with lots of press releases as deals are struck and shipment dates are met.
Watch them closely, and you’ll begin to notice a 0.0001 stock price jumps to 0.0002 or 0.0003 when a good-news press release hits. These companies are always full of lots of energy, so good news comes often. 0.0001 to 0.0002 is a 100% jump. To most of us who are used to trading $10 shares that jump 10% to $11 at signs of good news, 100% is a lot to think about.
Warning — don’t get greedy! This is the reason many people fail at this tactic and I get the sells over them. Take the 100% jump, and do not shoot for 200%. It’s more difficult to predict trading volume for a 200% jump than a 100% jump. Also, don’t push your luck. Many many many start-up companies fail every year. Flip a security three or four times, then upgrade the use of your new buying potential.
As I stated earlier, these companies must to have a large average trading volume. Usually, you’ll see the volume really show its face when press releases hit, because we run a reactive market. Realizing this number will help you to understand how many shares you’ll be able to get in and out of the deal at one time. Shoot for no more than a quarter of the average trading volume in your buys, and you’ll get the shares sold without much hassle when good news hits.
Naturally, this isn’t a great path for everyone, but it is a great way to gain good starting capital. If you’re rolling in the dough, there’s no need for high-risk strategies such as this, and you’re much safer and healthier sticking to the 10% gains.
Also, by selling at higher dollar amounts than you buy at, you’re helping the chances that a particular stock has to succeed and surpass it’s severely depressed value. It’s only when we sell low in fear that we depress the value of a security.
When you’re done flipping a company, if the market is in good condition, and their passion is still in the product, buy a small chunk to hold on to for yourself. More than likely, if you think the company has a great idea that they are capable of bringing to fruition, they probably will. By holding onto a chunk of your own, you also help the depressed value of the stock by decreasing the buy pool which also has a tendency to increase share price (demand is greater than supply). So, stake that long-term claim, and reap the rewards when your company makes it big.
-Aaron