Finance Wanted.

By Norman J. Lutes

Trading penny stocks for the most part is highly speculative. It more resembles spinning the roulette wheel in Las Vegas than it is like trading on the Nasdaq. One of the biggest dangers is that it holds some of the allure and mystique of the Las Vegas casinos. You hear of huge fortunes being made and you want a part. And it costs so little to jump in. It's so easy!

You will hear of fortunes being made - because there can be some degree of hype in penny stocks, especially in some of the so-called penny-stock newsletters. Penny stockbrokers have been known to engage in a mixture of cold calling and targeted sells. Say they have a collection of leads made up of people who have a history of buying into poor investments over the phone.

Using this list they'll call just to make contact. Later, they'll call back with a hot tip. "This is a ground floor opportunity of a stock that's ready to skyrocket." Meanwhile they are pumping up the stock in message boards, emails, newsletters, etc. As soon as investors buy in, the penny stockbrokers get out, taking investments and commissions with them.

Some micro-cap companies will pay people to hype their stocks for them. They might use newsletters, emails, or financial television and radio shows. The best advice here is to look at all of these with a wary eye. Check to see if the issuers of the recommendations are being paid for their services. That's the first clue of a bad investment. Also check to see if there are any press releases put out by people attempting to influence the price of the stock.

Keep in mind that the moves in penny stocks are lightning fast. It's nearly impossible for this type of up front information to ever be accurate. One would need to watch the stock over a period of days, and be ready to "pull the trigger" on a trade in a short amount of time. And be ready to sell just as quickly.

The key is not to rely on the hype. Use the Internet to do your own private personal research. Learning about a certain micro-cap stock may prove to be somewhat difficult because they are not required to file with the SEC and thus are not as publicly scrutinized or regulated as stocks listed on NYSE or Nasdaq. There are also no minimum standards for them to follow to remain on the OTCBB and Pink Sheets.

There may also be a lack of history on the company. The company may be a penny stock because it is newly formed or because it is approaching bankruptcy. The company could have a very bad track record - or none at all. This lack of history also makes research somewhat difficult. Notice I said difficult not impossible.

Another point to be aware of is liquidity. By watching the movement of a certain stock, you can see if there are high or low volumes of trading. If the volume is very low, you may be ready to sell, but there will be no buyer. You might have to lower your price just to get it s old. Frightening position to be in, to be sure.

Secondly, low liquidity means a stock is easier to manipulate. This is done in a number of ways. One example is to buy large amounts of stock, hype it up, then sell it after other investors find it attractive. (Would it surprise you to know this is called pump and dump?)

The waters of successfully trading penny stocks are fraught with many dangers. Here are a few tips in avoiding the worst of those dangers:

1. Look for consistent high volume of shares being traded. Not only how many shares, but how many trades per day. Is it one insider buying? Or many small time investors like you and me?

2. How did you find out about the stock? Mailing list? Penny stock newsletter? Email list? High-pressure penny stock broker? Of course there are excellent, highly educational newsletters out there. But watch for the ones who are "pumping and dumping." Research - then trade. Don't just trade, then wish you had researched.

3. Have an entry and exit plan - and stay by it. Penny stocks move very quickly. Keep in mind that if you purchase a stock at $.12 and it declines 2 cents, that's a 20% loss. If your investment was $10,000, that amounts to a $2,000 loss. How many dips like that can you afford? Find out what a "stop loss" is and use it wisely to protect your investment and your profits.

4. The most important tip is this one! Never invest more than 20% of your overall portfolio in penny stocks. When that 20% grows then reinvest the profits. Let your investments grow in increments. Never put more of your capital at risk than you can afford to lose.

Look for my companion articles to learn more important facts about trading and profiting from penny stocks.

I've been dabbling in penny stocks for a few years, educating myself in bits and pieces. The other day I got a call from one of my old frat brothers saying he too was researching penny stocks online. In his search, he ran across a crazy story about two geeks who have created a computer robot that does all the analysis work. They locked themselves in a room with 12 computers all running at once to test the system. (Shades of college-age Bill Gates.) The results are staggering. Winning picks right and left. See what you think. These two guys are so sold on their product they are giving people $100 trading cash! (Oh yeah, they named the robot, Marl!) http://www.dblpennystox.com