Penny Stock Bible:
■ What is a stock? A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. You are essentially buying a piece of a specific company.
■ Why Does a company go public? A company goes public in order to raise money to fund their current, and future businesses. They’re selling a piece of their business to investors, they do maintain majority of the shares, but they sell off a piece of the company to the public.
■ Buying a stock is buying a piece of a company with the belief the company will garner a higher price per share in turn selling for a higher price, generating a profit. (example, purchase a stock @ $30.00 and selling it at $33 per share nets you a $3 profit per share.
■ Shorting a stock is borrowing shares through your broker (ie; Etrade, Interactive Broker, etc) and selling the borrowed share at price A and rebuying the shares in hope at a lower price per share and returning them to the broker. With the excess profit you keep. (Example: short @ $33.00, “cover”, aka buy back the stock @ $30.00, nets you a $3 profit per share you short.
■ Volume- The amount of shares traded of a stock
■ Share Structure- The share structure of a company is made up of the amount of Authorized Shares, Outstanding Shares, and the float.
■ Authorized Shares- The number of stock units that a publicly traded company can issue as stated in its articles of incorporation, or as agreed upon by shareholder vote. Authorized share capital is often not fully used by management in order to leave room for future issuance of additional stock in case the company needs to raise capital quickly. Another reason to keep shares in the company treasury is to retain a controlling interest in the company.
■ Outstanding Shares- A company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock.” The number of outstanding shares is used in calculating key metrics such as a company’s market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS).
■ Float- The number of shares available for trading of a particular stock. Floating stock is calculated by subtracting closely-held shares and restricted stock from a firm’s total outstanding shares. Closely-held shares are those owned by insiders, major shareholders and employees, while restricted stock refers to insider shares that cannot be traded because of a temporary restriction such as the lock-up period after an initial public offering. A stock with a small float will generally be more volatile than a stock with a large float, apart from having limited liquidity and wider bid-ask spread. Because of these issues, institutional investors seldom invest in low-float stocks.
■ Earnings Per Share (EPS)-The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.
■ Price Per Earnings Ratio (P/E Ratio)- A valuation ratio of a company's current share price compared to its per-share earnings.
■ Dilution- A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur when holders of stock options (such as company employees) or holders of other optionable securities exercise their options. When the number of shares outstanding increases, each existing stockholder will own a smaller, or diluted, percentage of the company, making each share less valuable. Dilution also reduces the value of existing shares by reducing the stock's earnings per share.
■ Liquidity- The ability of being able to sell your shares in a stock easily, meaning bid and ask both have a good size, $5k+.
■ There are two sides to a market: the bid which is what a buyer is willing to buy the specific stock for, and an ask which is where the seller is willing to sell.
■ There are types of market condition, a bull market which is where the overall market is trending upward, and a bearish market, where it is a downward trend.
■ What is the Dow Jones Industrial Average? The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.
■ What is the S&P 500? An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
■ What is a Penny Stock? Penny stocks are highly speculative companies which trade under $5 per share. They garner extreme risk for investors due to extreme manipulation. Majority of penny stocks are scam companies, which really have no real business, and release bogus press releases to move share price, and sell shares aka dilution.
■ Penny Stocks move off of news released by the company, which majority of the time is bullshit news, it doesn’t mean anything, because 99% of the time these stocks won’t exist 2-3 years from now.
■ Penny Stocks also move off of pumpers, people who have a following of “traders” they alert a specific stock and in return, people buy the stock and make share price move. These are pump and dumps which is filled in the OTC.
■ The OTC is the exchange that penny stocks trade on, it is an unregulated section of the market where there is manipulation which is extremely predictable once you learn the chart patterns.
■ 99% of Penny Stocks you see today will not be trading in a year or two because they’re moving off of false and misleading information. There are a handful of penny stocks which built a real business and uplisted to the NASDAQ. (True Religion Jeans started as a share selling scam and is now a multi billion dollar company).
■ Do not trade in a stock with minimal liquidity, ask yourself can I sell my shares of this at a higher price?
Key Tips When Long A Penny Stock:
■ The OTC is littered with stories of where a stock goes up hundreds and in some cases thousands of percents in a very short period of time.
■ When holding a play for weeks, or even a month you have to stay focused and disciplined throughout the entire duration of the play.
■ Before loading a stock to hold for that key upcoming event, or playing that bottom go into that trade with a plan, think of how many shares you’d like to buy, and how you will liquidate that position.
■ Draw out your support and resistance levels before making your first transaction so you can get an idea on where you are going to enter or exit the stock.
■ Determine the price levels where you will begin selling your position whether it be taking out your initial, or closing your position entirely. Doing this before entering your trade is very important because it takes a lot of experience to be able to think of your exit on the spot because too many emotions come into play.
■ After you’ve had a winner especially don’t jump right into your next play, its human nature to do so, but you need to resist the urge of jumping into your next play. When you make money on a stock, you’re likely very confident, excited, and eager to get into your next trade. That is a huge mistake made by traders, you need to take a step back and fully assess the trade you are going to enter, this is not a game, its a business, and you need to remind yourself of that.
■ When you’re on a “cold streak” where you’re constantly losing money on trades you need to take a break. Commonly, people do not want to look at the trades that went wrong, and you’ve lost on. Those trades are actually the most important to look at because learning from your mistakes is extremely important. You can’t blame the market, or blame someone else when you lose on a trade, assess the thought process when entering the trade, during the trade, and when exiting the trade. You’ll notice a pattern on losing traders, determine the type of plays they are, and simply ignore those setups. For instance; I do not like ‘trips plays’ stocks trading at .000x , my success rate on them is very low therefore I ignore .000x stocks because I generally lose on them. It has to be a very unique situation for me to go into a trip stock. So find out which stocks your success level is low on and high on, learn why your success level is high and low on those plays, and what you can do to improve.
■ 9:30-4pm is only part of the game, analyzing your trades is probably the most important thing any trader can do.
Quotes:
■ Level 1: A trading service that displays real-time bid/ask quotes and last sales for securities trading on a stock exchange. Level 1 quotes supply basic information that may suffice for most investors, but not for active traders.
■ Level 2: A trading service consisting of real-time access to the quotations of individual market makers registered in every Nasdaq listed security, as well as market makers' quotes in OTC Bulletin Board securities.
What is a market maker?
A market maker is the person responsible for executing the orders you place. For instance, when you place an order for a stock, the order gets sent to a market maker who puts it in the “queue” to be executed when another market maker places a buy/sell order for the security.
Example: I place an order to buy Apple (AAPL) at $500. The stock is trading at $502. When the stock falls to $500, someone else, a seller, will sell me their shares at $500 per share.
Market Makers:
Market Makers are the people responsible for executing your trades, when an order is placed via your broker, then is sent to a “MM” market maker. There are various MMs in the OTC which
Level 2 Quotes:
Level 2 Quotes show you what is behind a standard bid and ask, and the market makers involved with it. It shows you strengths, supports, etc. of a specific price level. For example this is what a basic level two quote will show:
It will outline the lot size of a specific trade (amount of shares in the order) and the market maker placing the order. The left side is the bid, and the right side is the ask. Within the OTC there is a ton of manipulation that takes place by the market makers, traders, insiders, etc. Once you see L2, and follow stocks, it becomes very predictable when a dip or a strong uptrend will occur.
Here is a guide to market makers and the common roles they play in a stock:
Retail Market Makers:
NITE:
CDEL:
ETRF:
ATDF:
Details
The market makers such as NITE, CDEL, ETF, ATDF will appear on the bid and the ask and they’re irrelevant because they’re only retail.
Institutional Market Makers:
LAMP:
PUMA:
FANC:
BKMN:
CANT:
Details:
-Seeing these market makers appear on the bid side near current price levels is a good indicator. They’ll provide support for the stock and often “declare a bottom”.
-Seeing them on the ask side isn’t the greatest indicator because they’re known for owning a large sum of shares so the price level they appear on the ask at can be a resistance level.
Short:
ASCM:
Details:
ASCM is the most popular market maker for shorting penny stocks and create a scare when their on the ask close to the current price level. ASCM often appears on very volatile stocks that made a nice move and ASCM looks to short for the price per share correction.
When ASCM appears on the bid side close to the price level it means they’re covering their position. In order to cover, they need to buy back the shares they shorted; so it often provides an area of support.
Dilutive Market Makers:
VFIN:
VNDM:
VERT:
BKRT:
BMAK:
Details:
Market Makers VFIN, VNDM, and VERT being the “lead” on the ask is a negative indicator. Being the lead on the ask is being the first market maker at the ask price for the stock. When VFIN, VNDM, VERT are there it is often company dilution, so there can be limitless amounts of shares there. The V brothers often cause a scare if they show up on the ask.
The V Brothers can also create buying pressure by appearing on the bid. If the price level approaches the level VFIN, VNDM, and or VERT are on the bid people see that as a “bottom” and the stock will move up from that specific price level.
BKRT, and BMAK are often company dilution as well, BKRT is dilution more so than BMAK. BMAK’s role is: when a company has a convertible note, and that note gets exercised, and the shares in the note are sold, its often through BMAK.
Manipulative Market Maker:
WORL:
Details:
WORL is often shorting the stock and will appear as the lead on the bid and the ask on a volatile stock. WORL manipulates the market by selling to itself and causes the price level to artificially rise or fall. When WORL shows up its often a headache and you can make a decent 5-7% on a swing trade.
Charts:
Learning the roles and patterns of specific market makers can give you a serious advantage in the market. Especially within the OTC where there is constant stock manipulation occurring, you can understand what the market makers are doing and it can be used to your advantage. Using and properly reading Level 2 within the OTC is an essential part of trading.
Reading Candlestick Charts: