General Review on Penny Stocks

May 30, 2010 · Posted in Stock Market · Comment 

Generally, any stock that trades outside the major stock exchanges and also that is taken as depreciatory is known as “penny stock”. These major stock exchanges include NYSE, AMEX or NASDAQ. Sometimes the terms penny stocks, small caps, and nano caps are brought into use without interchangeably. But the rank of the penny stock is determined by share price, not by market capitalization or listing service.

Market caps of penny stock are often less than $500 million. Those that trade on low volumes over the counter take it as highly speculative. It is believed that it may prove hard task to sell penny stocks, once they are purchased. This is because of the fact that it may sometimes be difficult to locate quotations for particular penny stocks. Investors in penny stocks are expected to remain ready to face the possibility of losing their entire investment.

Nevertheless, the penny stock is able to lure new investors with its low price and its possibility to receive speedy profits that may reach up to one hundred percent in certain cases. In a very similar way, there always remains the possibility of severe drops that may even reach over 90 percent in the long term. Penny stocks are considered as investments, in which risk factor is highly involved. Consequently, investors must be aware of the various risks that are involved, such as limited liquidity, lack of financial reporting and fraud.

If liquidity is given prominence, then penny stock has very fewer shareholders. It is less “liquid”; this term means that in comparison to a larger company, it will buy and sell less shares. Any unnoticed change in the demand or supply can result in the unpredictability of stock price. Consequently, it may lead to the rapid rise in the stock price or bring it down to the earth. Therefore, due to the lack of liquidity and volatility, penny stock is more likely to be exploited by management, market markers or third parties. It becomes very tough to sell a stock specifically on a day, when there are no buyers because of the lack of liquidity.

Another reason is that to remain on the OTCBB, the listing requirements are very minimal as compared to NASDAQ or NYSE. Generally, what happens is that those companies which could not make on bigger exchanges or have been de-listed, here they have an opportunity to get re-listed on the OTCBB or Pink Sheets.

Moreover, if compared to major markets, stocks trading on the Pink Sheets hardly have any regulatory or listing requirements. There is nothing to provide protection to shareholders such as accounting standards, change in notification of ownership of shares and so on.

All these features make it easy to use penny stock in any deceitful scheme. However this does not mean that all stocks that are listed on the OTCBB are deceitful. A number of stocks on the OTCBB have fair-trading.

Author: Stefan Rockhaus
Article Source: EzineArticles.com
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Day Trading Basics

March 14, 2010 · Posted in Penny Stocks · Comment 

A means to survive, an avenue to progress and vista to exchange thoughts, ideas and feelings… ‘Trading’ is perhaps as old as human existence on earth. It all began when the primeval man began swapping small useful items with each other in order to live and fulfill many of his needs. The time that followed saw a persistence and enhancement of this tradition. The current world runs on trading. It is a means to fetch bread and butter to many while for a large number of people trading business serves as toppings on a well-made cake. Trading therefore preserves an unparalleled significance across the globe.
This article will educate you about the various types and means of day trading, key terms and issues associated with it along with their benefits and shortcomings.

Types of Day Trading- depending on the time period for which the day trader retains the stocks with him or under his custody, different types of trading are classified.

o Basic Day Trading- Day trader commences the day by collecting stocks keeps them for sometime and endeavors his best to sell all of them at the end of the day. His primary work constitutes the sale and purchase of stocks. These transactions enable him to bag good short-term profits and mitigate the risk of sale of stocks in a fluster due to fluctuating price.

o Swing Day Trading- the day trader preserves the stocks for relatively longer period of time such as for few hours and few days to accrue big profits. But swing trading runs the risk of unstable market prices of the stocks.

o Position Trading- as the name suggests, the trader purchases the stocks and arrange the sales keeping in mind the position or the market value of the stocks. This may entail keeping the stocks for few weeks and even months, but good returns usually follow.

o Online trading- can be of any of the three aforementioned types but the sale and purchase of stocks is done via the Internet. Since this trading is through the medium of computer, an efficient computer with a 24-hour Internet connection is an essential requirement.

Issues behind S & P- When it comes to day trading, it is found that some particular stocks are good or beneficial than others. Primarily there are three factors that govern the sale and purchase of stocks-

1. Liquidity of the stock- Liquidity designates the amount of buyers and sellers for the stocks concerned. Liquidity of the stock is deemed to be directly proportional to profits ensued by it. Greater the liquidity of the stocks, higher is the comfort in vending them. But the liquidity value is never stagnant. It too depends on certain factors such number of share holders, outstanding shares, volume of transactions made and the number of market makers.

2. Volume- contributes to the liquidity factor. It can be conveniently evaluated. For instance a day trader’s stock should trade a minimum of 500000 shares each day.

3. Volatility- stands for the ups and downs the stock experiences everyday. If the volatility is less or negligible then the stock does not undergo any fluctuations and is thus rendered bad for day trading. It is believed that stocks that are considered good go through at least a $2.00 variation per day of normal trading.

4. Price Transparency- is the term coined for the market depth and the potential of the trader to acquire knowledge about the order of the stock.

General Tips for successful day trading

o Study the market carefully before proceeding with purchase of stocks. The market indicators displayed on television and announced on radio are the best means to know about the market trend for the day.

o Do not be motivated by profits always. Every transaction may not translate into profits. Adopt a strategy and stick to it. Don’t flip your technique of working frequently.

o Be resolute and patient. If you are unable to incur spontaneous gains, profits may occur eventually.

o Never forget that day trading is a risky business and where there are profits there are losses too.

Author: Mansi Aggarwal
Article Source: EzineArticles.com
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How to Become a Stock Market Genius

February 28, 2010 · Posted in Stock Market · Comment 

Stock market trading is very popular among investors. However, ups and downs in the market make several investors reluctant to enter the stock market trading. Everyone knows about the potential of stock markets that has the caliber to make anybody millionaire overnight. The game of market pays you extremely well and requires very less time input from you. Even if you are new to the markets, you could become a stock market genius by following some easy tips.

Always remember two golden rules of the stock market game; emotions have no place in trading and one must enter the market with extreme dedication. If you have these skills then you could easily become a market genius by following the tips given below. Following traits are mostly found in most of the successful market genius.

1. Don’t be fool- never buy dead stocks- Many investors buys dead stocks with a hope to make money from them. Such thinking is totally absurd. Always remember that the dead stocks have no value and that is why they are dead. However, you could go ahead any buy penny stocks. All dead stocks are penny stocks but not all penny stocks are dead stocks. Many people had tried buying penny stocks and over a period of time they have made millions by investing in such stocks.

2. Research is the key to success- in stock market trading one has to be really very active while researching for stocks and trading opportunities. The lazier in researching you are, the more money you will lose in the course of your trading. It is very important that a trader must take time to research and find out the best stock for him before he funds in it. If you are also interested in buying the penny stocks and getting rich with them then only hard research could help you buy such stocks. Whatever you do while researching, always remember that it is helping you gaining experience and knowledge of the market. Higher returns in stock trading are only possible if one research deeply.

3. Always invest in stocks that have good liquidity- Liquidity means the conversion for the share for cash. So, whenever you buy a stock, must check for its liquidity. Of course dead stocks will never provide you liquidity. Shares with more liquidity are popular on the stock markets and of course guarantees you more returns. Checking liquidity of shares is easy. Simply analyze the volume of trades for the past one week of the share you want to check liquidity for. Liquidity refers value of the share and therefore more liquidity means more value and vice versa.

4. Determine the undervalue stocks and positions in them- when going for purchasing shares, you must lookout stocks that give you more dividends. This is called as dividend research. So next time you buy the stocks, simply perform dividend research and go for higher dividend paying stocks.

5. Market watch- again one of the most crucial task, you need to perform. Before buying any stock, you must look for oversold or overbought and then decide your move. Keeping a watch over the market will help you take good decisions and you will be updated with the current trend of the market.

6. Effective planning- before entering the stock trades one must plan his trading strategy effectively. Many investors buy stocks, and do not know when they have to come out of the trade as a result they lose money. If you preplan your trade then not only you will make money but would also be able to avoid emotions (the biggest enemy of a stock trader.)

7. Check for stocks from reputed companies- this does not means that you have to buy the top stocks that cost very high. By checking for stocks from reputed firms means that before buying stocks of a company you must cross check the reputation of the firm. It will help you determine their trading practices, which indirectly affect value of their stocks. Even if the shares of a company are at low (risk), one could buy invest in them citing the past company performance and its reputation.

Becoming stock market genius is not a tough job. Following few simple tips anybody could become a successful stock market trader.

Author: Micheal James
Article Source: EzineArticles.com
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Managed Futures and Hedge Funds

December 23, 2009 · Posted in Stock Market · Comment 

Are you in the market for an alternative investment? If you are one of the prudent investors who is seeking to allocate a portion of assets to strategies not normally employed by the investing public this article is a must read.

There are primarily two forms of alternative investment management, hedge funds and managed futures. Hedge funds are invested in a vast number of products, both exchange listed and Over-the-Counter (OTC) derivatives. Managed futures are generally only invested in exchange listed commodity futures contracts, regulated by the Commodity Futures Trading Commission (CFTC). Be careful! If the wrong investment is chosen the investor may be left with a bad experience of alternative investment products. This article will focus on the very important issues of transparency, liquidity, lock ups, returns and taxes in regards to the alternative asset class. Readers should leave with a better understanding of a few of the primary issues involving any alternative asset investment.

TRANSPARENCY

Transparency is an issue with any investment. Most investors want to know exactly what their money is doing at all times. Giving money to someone who claims to have returns of X without knowing what the manager is actually doing is generally a bad idea. Transparency is becoming more and more of an issue as the universe of investable products grows exponentially. The recent hedge fund “blow-ups” are a case in point.

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Hedge funds are alternative investment vehicles that can be invested in anything from Johnson and Johnson common stock to over the counter derivatives based in Zimbabwe. The universe of products is virtually limitless. When an investor becomes a limited partner of a hedge fund, in most cases he/she is giving it free reign over the funds they have invested. If the manager chooses to, he/she could invest in waffles and chances are the investor would never have any idea. Hedge funds are not required to tell investors exactly where capital is being deployed. To make matters worse, many of the products do not have a closing value at the end of the day, so even if the investors knew what the funds were invested in they would have no idea what their investment was actually worth on any given day. There is absolutely no transparency. All the investors get is a quarterly statement informing them of gains or losses and maybe some commentary if the manager is not too busy. In some cases investors hear that, virtually overnight, more than 50% of their funds have been lost. Long-Term Capital Management is the most infamous case of a hedge fund “blowing up,” but recently there have been quite a few more that are going down in history, such as Amaranth’s $6 billion loss in 2006, Absolute Capital Groups’ 30-40% loss and Focus Capital’s 80% loss in early 2008.

The story is much clearer if the investor is involved in a managed futures product, or with a Commodity Trading Advisor (CTA). A CTA generally has a very specific strategy that is defined in the investor’s disclosure document, which is similar to a prospectus. The CTA is required to state exactly what products the investor’s money will be invested in as well as exactly how the manager plans to invest. What’s more, once invested with a CTA investors will receive a statement every time a trade is placed. At the end of every day the products in which investor capital is deployed are marked with a closing price determined by the exchange. This allows the investor to know exactly what his/her investment is worth.

It is really up to the investor as to what makes him or her comfortable. If one person does fine not know where his assets are invested then the transparency issue may not need to be considered, but for most of us it is of the utmost importance.

LIQUIDITY

Liquidity: a business, economics or investment term that refers to an assets ability to be easily converted to cash through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. (defined by wikipedia.org)

Liquidity can be an issue with both hedge funds and managed futures, but a good manager will tend to avoid instruments that are illiquid or difficult to trade in and out of.

As stated previously, hedge fund managers can and do invest in a vast array of products. Many of these products are OTC derivatives or products that are traded between banks and the hedge funds directly. If the hedge fund buys an OTC derivative from a bank, and later decides it needs to sell that particular product back, the bank alone determines what they will buy it back for, or worse, if they can buy it back at all. In that case the hedge fund may not be able to get out of a losing position.

Liquidity is an issue that has gripped a number of hedge funds lately. Many have been forced to shut down because they were invested in highly illiquid derivatives linked to sub-prime mortgages. When the counter parties began to refuse to buy the products back the funds had no choice but to liquidate their portfolios at extremely discounted prices and shut their doors, or refuse investors’ requests to withdraw their money.

Unfortunately liquidity can be an issue for managed futures as well. Most managers only trade in highly liquid commodities; however, there are times when even the most liquid commodity can become illiquid very fast. Illiquidity can be caused by many factors, from politics to supply and demand imbalances to general investor fear and greed. A prudent manager will prevent investors from being too exposed to liquidity risks by implementing some sort of hedge, diversification or proper position sizing of the account.

When dealing in listed markets, as most managed futures products do, the counter party to any trade usually has a number of other counter parties willing to buy or sell at specified prices. This kind of open auction system generally allows for prices to be fair. To give investors even more comfort each account is guaranteed by the exchange clearing house through customer margin deposits, meaning that the chance of a counter party defaulting on any given transaction is drastically reduced. However, when dealing with obscure OTC markets, as many hedge funds do, most of the time there is only one counter party to the trade, meaning it is not guaranteed by anyone, which not only makes the chance of default higher but at the same time makes the likelihood of getting a fair price on any given trade much less.

When investing in a hedge fund or managed futures product it is important to understand how liquidity can affect the investment. If a manager is using too much leverage or is consistently involved in thinly traded OTC products that are less liquid it may be a sign that investing in that vehicle at that time is not wise.

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LOCK UP PERIOD

A lock up period is the time after the initial investment in which the investor is not allowed to withdraw funds from that particular vehicle. After the specified lock up period investors are free to withdraw funds as defined in the disclosure document of each hedge fund.

Almost all hedge funds have a lock up period. This period can range from as little as three months to longer than two years. Generally the more established the fund the longer the lock up period. A lock up period is generally good for managers and not so good for investors. If a manager has a lock up period of one year and immediately after making an investment the trading starts to go poorly, that manager has a right to continue trading that money until the lock up period is over; because the investor has previously agreed to the terms and conditions in the disclosure document he or she is not able to request redemption until the specified time period is up.

Managed futures products are different. Most managed futures products do not have lock up periods. There are a few that have lock ups ranging anywhere from three months to a year, but this is not the status quo in the industry. If an investment in a managed futures product needs to be redeemed it can generally be taken care of within a few hours. This is very beneficial if you have taxes due, college tuition that needs to be paid or any unexpected expenses that comes up.

Lock up periods will be foreign to most investors who have not invested in alternative investments before. Make sure when reading the disclosure document that the lock up and withdrawal periods are properly discussed. Also, note that in many cases the lock up period is an area that can be negotiated to the investor’s benefit.

RETURNS

Returns are returns, right? Wrong! Returns are a very deceiving form of analysis for any alternative investment. Most investors make investment decisions based on previous returns, but this is a flawed concept. The main issue is that past returns have absolutely nothing to do with future returns. This has been proven time and time again as managers that were once out-performing begin to under-perform and managers that were struggling rise to the top. Wise investors will not base their investment decisions on past returns or assumptions made about future returns.

The fact of the matter is that no manager really knows what returns will be from year to year. Managers can target a certain return but there is absolutely no guarantee that the goal will be achieved. If any manager, whether hedge fund or CTA, specifically promises a return that is a sign to seek a different manager. Likewise, if a manager touts his/her past returns it is a sign he/she does not fully understand that returns are completely unrelated to each other and have no bearing on the future.

There are numerous databases in which managers can post monthly returns and potential investors view them, but this is completely the wrong way to make any investment decision. Chasing returns leads investors down the wrong path and can have devastating effects on their capital (see “Transparency”).

What investors need to do is search through these alternative investment managers by strategy, not by returns. The investor should pick a few advisors from each category after reading about the managers’ approach to the market. Once a few are decided on, the investor should call each manager and request more information and/or a meeting. All managers will have a disclosure document and possibly some marketing material that can be given to potential investors. Meeting the manager of a hedge fund can be a difficult task unless the investor is placing a very large sum. CTAs, however, are generally much more open and willing to meet with investors, so getting a meeting with them is entirely possible.

Once the proper due diligence is done and the investor likes the manager’s strategy and approach, an investment can be made. Be careful not to invest too many assets with any one manager or specific style, as that is not proper diversification. It is wise for the investor to build a portfolio of alternative asset managers over a wide range of strategies, as this may reduce the risk of any one particular manager or style.

TAXES

Hedge funds often provide the investor with very unfavorable tax treatment because they are invested in many different products all over the world. This may have a vast array of consequences on the investor’s overall taxes. Hedge funds uniformly report investors’ gains or losses in August after each tax year, forcing an extension of filing. Additionally, the tax returns are very complex, often over 30 pages for each fund invested in. To try and explain all the possible tax consequences of a hedge fund would probably require an entire book. In the interest of time the entire spectrum of hedge fund tax accounting simply cannot be delved into at this point.

For managed futures products the tax accounting is very simple. Since most trades take place within Regulated Futures Contracts (RFC) regulated by the CFTC, contracts receive Internal Revenue Code Section 1256 treatment. In this case 60% of profits are taxed at the long-term capital gains rate and 40% are taxed at the short-term capital gains rate. For a profitable managed futures product this effective tax rate of 23% provides a 12% advantage over hedge funds that trade frequently. This can, however, be a stumbling block in the case of large losses. When a loss is recorded and 60/40 treatment has been elected the investor is only allowed to carry forward $3000 of those losses every year. If the investor’s loss is large this can be a real headache, as he/she will be carrying forward losses indefinitely. There is a bright side, and that is if the investor has created a portfolio of managed futures products and another manager has produced gains the investor can write off the loss against the gains of that other manager.

In the end calculating taxes for a managed futures product is much simpler than for a hedge fund. For some investors this may not be an issue, as their CPAs will manage everything, but it would be important to consult with the CPA prior to investing to make sure he/she fully understands the implications involved with the new investment.

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Article Source:http://www.articlesbase.com/day-trading-articles/managed-futures-and-hedge-funds-1617896.html

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Clearing Up Myths About Penny Stocks

October 30, 2009 · Posted in Stock Market · Comment 

People usually fear what they do not know. You cannot judge or label something until you get to know it.

First impressions are a perfect example. One person may have preconceived notions about somebody who they dont know much about. Once they get to know that person, they realize that their first impressions were invariably false.

The same thing applies with penny stocks. Penny stocks get a bad first impression. They are quickly written off. The purpose of this article is to get past that first impression, to really dig deep and see if these bad impressions are warranted or not.

Below are some of the myths that always seem to shadow penny stocks.

Myth #1

Youll lose all your money if you trade penny stocks.

This stems from the belief that trading penny stocks is risky. Actually, any form of investing in stocks will always invariably involve risk. The only way you will lose all your money trading penny stocks is if you dont bother trying to minimize the risk. The key is to look to minimize that risk! Its as simple as that.

For example, starting your own business incurs high risk. Does that stop people from doing it? No. And you know what? The people who succeed in starting their own business are the ones who minimize the risk. They do that by researching on how to successfully start their own business by reading, talking with people and taking action. The same thing applies to penny stocks.

You will not lose all your money by trading penny stocks provided that you minimize your risk by researching, learning, and practicing trading before starting.

Myth #2

Theres not enough liquidity in penny stocks.

What do people mean by liquidity? Liquidity simply means having enough volume to easily buy and sell your shares. For example, if a penny stock only has two trades, its liquidity is said to be low. There are not enough traders to buy and sell.

However, if a stock is experiencing huge amounts of trades, thereby indicating the presence of a large number of traders, its liquidity is said to be high because you can easily buy and sell shares.

Looking at an after market report recap of penny stocks will reflect that there is more than enough liquidity in penny stocks.

Myth #3

Its easy to make money in penny stocks.

When it comes to penny stocks, the math looks very appealing. Buy shares at a penny and sell them for two cents. There, you just doubled your money. If it were that easy, people would be millionaires.

The fact of the matter is that trading penny stocks can be very rewarding. However, that reward goes to those who educate themselves and paper trade (practice trading with fake money to gain experience), in other words, goes to those who are willing to pay the price to learn.

Thats precisely the reason why some people are very negative toward penny stocks. They have been attracted to the potential of making money, only to rush in without any sort of training or education and become disillusioned and embittered.

Despite all the stereotypes that seem to follow penny stocks, theres one aspect that everyone agrees on. Penny stocks involve high risk and high reward. Theres no doubt about that. The key to getting that high reward is to learn how to minimize the high risk. Its as simple as that. Its as simple as that.

Author: Jason Brook
Article Source: EzineArticles.com
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