Penny Stock Trading Could Scare The Uninformed.

Many people – investors and traders alike, are of the opinion that trading in penny stocks is risky. There are many reasons – low capitalization (below $100million), low stock price (below $5 in the U.S.), and low trade volume. As may be found in various articles about penny stocks, these factors are what make these stocks susceptible to price manipulation like – pump and dump, or short and distort schemes from unscrupulous traders.  Luckily, there are ways on how to go about this. You can minimize risk by using stop limit orders and position sizing, relative to average trade volume to limit downside risk or to lock in your profits. Winning the game on penny stock trading would depend on your investing fundamentals.

Some such questions would be, “If we know the fundamentals on minimizing trading risk, how do we manage the risk on the underlying side of business?” The answer to this query would depend on how you define risk. Though penny stock may be considered as a small micro-cap entity or just in the initial stages of organization, you can apply the same quantitative techniques that are most commonly used for bigger companies. Ironically, the same techniques can be applied to identify the risk involved in a particular Stock if it is worth investing in. The Securities and Exchange Commission has this to say about penny stocks:
“While all forms of investment have inherent risk, the most risky is the microcap stocks.” Founding and Managing Director of Stone Streets Advisors, LLC, Jordan S. Terry had this to say, “Most of these companies are new and with no verifiable track record. A number of these firms do not have fixed assets or regular operations. A few have products and services that are still in the development stage that would still require further product testing.”
These statements would tend to generalize the basic fundamentals of penny stocks. In general these stocks are akin to the early development phase of any company where you find venture capitalist and angels as investors. The comments by SEC could apply to both public and private companies who are still on their early stages.  The Harvard Business School Senior Lecturer, Shikhar Ghosh, has come out with several interesting statistical data regarding the early stages of corporate failures. He concluded that, “Without considering the possible existence of fraudulent activities, the reasons for business failures in both private and public firms are relatively the same.”
How then do we know if it’s worth our while to invest in a given penny stock? Terry says, “I prefer to look at things bottom-up, though I would not hesitate looking at it top-down regardless of market cap. I think this type of analysis works well for penny stocks. Recently, a client hired my services to study Nuvilex (NVLX) a highly volatile micro-cap penny stock. There is much detail about the said project, but I used the company research approach to separate the so-called wheat from the shaft. “
“I was skeptical of Nuvilex when I first looked at it: micro cap stock, highly volatile, very low price, no discernible revenue, terrible financial reports, and strange operations that spanned more than a decade. However, after a thorough research,  it made me realized that the company’s technology has great potentials. Barring the existence of fraud, I would say that the simple Porter’s Five Forces analysis is a good way to start looking over any stock company or corporate capitalization,” said Terry further.
He continued, “On a scale of 1-10, I would give Nuvilex at 7.5 to 8.5 based on the Five Forces analysis and the public documents that I have reviewed on. Reviewing the company on its own, I would say Nuvilex could change the way on how we look at cancer, diabetes, and other debilitating sickness -on how these are treated or even cured. The vision of the company represents a paradigm shift in medical technology brought about by researches on cell therapy and advancements on stem cell technology. “
Being skeptical, Terry inquired, “Does this mean that since the bottom up meets top down analysis, it is A-Ok? Is it this easy?” He explained further about segregating the shaft from the wheat, “Just because something looks promising does not mean that we do not have to look closer at the ground level. Doing that would make us miss something – shady management, lousy financial reports, and management irregularities, etc. When I looked closer though, I found it reassuring to find Nuvilex’s financial reports in order as compared to the inaccurate reports being hankered by management about – pump and dump, questionable micro-cap stock, and other SEC reports that are absolutely senseless given the idiosyncratic attributes of the company. On the extreme, Nuvilex looks like a winner – with intellectual property rights, plenty of publications, accomplished leadership in a particular medical niche, and a revolutionary technology that can extend if not, save millions of lives. When I looked for competitors in the same market, there was only one  – that explicitly disclaimed any knowledge for the IP violations, and dragged customers to be the caused of the problems. Hence, Nuvilex does not really have competition in this particular market.”

As a conclusion, Terry stated, “The primary consideration here is to never judge a book by its cover; second, beware of the word of mouth advice since most people do not have a real grasp of what investing is all about, and lastly; always be diligent in looking for any shady deals or shady characters – if the thing is too good to be true, it probably is. So, Buyers beware!

Read more