| The Nature of Penny Stocks | | | | strongly in price over a short time frame, indicating |
| For anyone new to investing in penny stocks, you | | | | that the particular issue is has excellent investment |
| should first be made aware of the differences | | | | potential. |
| between these micro-cap stocks and the more | | | | Fundamental Strength - Fundamentals involve such |
| conventional blue-chip and mid-cap investments. Unlike | | | | criteria as earnings, debt load, assets, and many |
| buying shares in a large, stable company like Ford or | | | | others. It was long thought that earnings were the |
| IBM, you are dealing with speculative investments. | | | | major driving force behind share prices, but Modern |
| Penny stocks literally trade for pennies per share, or | | | | Strategies Inc. has since disproved this theory as it |
| for as much as a couple of dollars. The beauty of | | | | applies to penny stock companies. Instead, |
| penny stocks, of course, is that sometimes they | | | | uncovering the best medium to long term investment |
| 'grow up' and become mid-cap stocks, multiplying in | | | | opportunities must be done through exhaustive |
| value hundreds of times over and making many | | | | analysis of company financial statements. Investors |
| people very wealthy. | | | | should get involved with the companies that are |
| With penny stocks, also called micro-caps or juniors, | | | | making the most money, have the most effective |
| you will see much greater price volatility, and thus | | | | management, and have improving trends in all factors |
| greater and quicker gains and losses in asset values. | | | | of their operations. As well, industry comparisons and |
| It is precisely this volatility which draws investors to | | | | the examination of key financial ratios present clues |
| the junior markets, as one good pick could make you | | | | as to which companies are destined for higher share |
| hundreds of times what you could ever make on the | | | | prices. |
| larger markets. | | | | Proper fundamental analysis of penny stock |
| Of course, there is more risk than buying bonds, blue | | | | companies will generally reveal that there are about 2 |
| chips or defensive stocks - but this added risk is | | | | or 3 superior investment opportunities out of every |
| tempered with the possibility of making the big gains. | | | | 100 companies examined. These 2 or 3 excellent |
| Most penny stocks, but not all, are resource or | | | | corporations often represent better investments |
| technology companies who initially sold shares in an | | | | than 90% of stocks on the large-cap markets like |
| effort to raise money for exploration or product | | | | the NYSE. |
| development programs. Many of the companies have | | | | Undervalued Situations - Sometimes companies see |
| large debt loads and are not necessarily making more | | | | their share price slide dramatically. There are |
| money than they are losing. | | | | occasions where this decrease in price has very little |
| However, it is the potential of a major, or even | | | | to do with the underlying fundamentals, and more to |
| minor success in their quest that often incites | | | | do with factors such as overall market weakness, |
| dramatic price climbs, and this is where their value lies. | | | | interest rate increases, or others. |
| Profit Potential | | | | Opportunity exists in such situations because the |
| Modern Strategies Inc. owner of has been in the | | | | shares are often 'unfairly valued' and a return to |
| business of researching penny stocks for many | | | | more realistic prices is inevitable. There are often |
| years, and has become effective at uncovering the | | | | cases where companies have more cash on hand per |
| best small cap investment opportunities and the most | | | | share than their share price, or have price to earnings |
| rewarding profit situations in the penny stock | | | | ratios as low as 5.0. Although there is much more to |
| markets. | | | | uncovering the best undervalued situations, this is the |
| There are several ways to profit from penny stock | | | | basis behind the concept. |
| investments. Modern Strategies Inc. has uncovered | | | | Minimized Downside - Often the combination of |
| the most highly rewarding investment situations. | | | | technical analysis and undervalued situations can |
| Promotional Stocks - These issues may or may not | | | | reveal penny stock companies that have tremendous |
| have much actual value. Promoters generate interest | | | | upside potential, and have a very low probability of |
| in these types of stocks in an attempt to drive share | | | | declining in value to any significant degree. |
| prices higher. The promoters own great amounts of | | | | These type of investments are excellent choices for |
| shares and so they make more money the higher | | | | penny stock investors that are less risk adverse. |
| the share price travels. Eventually, they sell their | | | | Special Notes About Penny Stock Companies |
| holdings into the promotion and generate great | | | | Penny stock companies change their names more |
| personal profit. Then they move on to the next | | | | commonly than other publicly traded companies, and |
| project, leaving the original stock and all its investors | | | | are also subject to more stock-swaps and |
| behind. Without the work of the promoter, the | | | | consolidations. In any of these events, your shares in |
| promotional issue soon comes crashing down. | | | | your account will be automatically replaced with the |
| These are the type of stock investor hear horror | | | | appropriate stock by your broker and notice will be |
| stories about, because many people often lose a | | | | delivered to you. |
| good deal of money when they are naive about | | | | For example, if you owned 5000 shares of EXO and |
| promotional ploys. However, getting in on a | | | | for every 5 shares you were to receive 2 shares of |
| promotional stock early in its life cycle, and keeping | | | | LOR, you would find your account holdings |
| an eye on the actions of the promoter can be very, | | | | re-adjusted to reflect 2000 LOR which can be traded |
| very rewarding. It's like having a full time stock | | | | as normal. You will no longer have the 5000 EXO. |
| promoter doing everything in his power to get the | | | | On rare occasions, a penny stock company can |
| share prices of the stocks you own to go through | | | | become delisted. This means that the shares will no |
| the roof, and investors who get in early can go along | | | | longer trade on the exchange, and if the company |
| for the ride! | | | | does not get listed on another exchange or |
| Technical Precursors - Often technical analysis can | | | | re-instated at a future date, you may be subject to |
| reveal patterns in the trading cycles of penny stocks. | | | | a loss of capital equal to 100% of the total |
| Sometimes these patterns illustrate excellent buying | | | | investment. However, this is a very rare occurrence, |
| opportunities, where the underlying stock has a high | | | | and there are simple ways to protect yourself |
| probability of moving up strongly, and only a low | | | | against it which are periodically discussed in Modern |
| probability of declining in value. | | | | Strategies Inc. publications. Delisting generally |
| In addition, there are sometimes situations where | | | | becomes a greater concern for investors who intend |
| several positive technical indicators combine at once | | | | to use a long-term (several years) buy and hold |
| to reveal that an issue is very likely to increase | | | | strategy with penny stocks. |