0 to Penny Stock Pro in One Issue
Whatever your current knowledge of the stock market is, you can get educated and take power to manage your own successful portfolio.
It all comes down to how hard you’re willing to work.
You need to learn the knowledge and patterns necessary to act on research and informed judgement.
If you’re just getting started, this breakdown provides a brief tutorial of what compels investors in the stock market. You’ll see every step of the process broken down.
Let’s start with what drives stock price up and down…
Supply and Demand
On the most fundamental level, supply and demand in the market determine stock price.
If more people want to buy (demand) than sell (supply), the shortage drives up the price.
If more people want to sell a stock than buy, surplus drives the price down.
Demand is determined by investor’s present and future valuation.
Publicly reported earnings are the profits a company makes, without which, no company can survive long term.
Companies are required to report their earnings quarterly.
This, along with earnings projections, are major drivers of investor activity, as investors base their future value of a company on earnings projections.
This is what we were talking about all last week — it’s what I like to call RALLY week. Like I told you guys then, it’s one of my favorite times to to trade. And it’s because of what earnings reports indicate for a company’s current and future growth.
Price movement reflects what investors feel a company is worth now and in the future.
A high or low stock price, in comparison to the stock’s history and the current market, determines the growth investors expect in the present and future.
The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding.
But remember, a company’s value is not determined solely by its stock price.
When comparing two companies, looking just at the share price of each is meaningless.
For example, a company that trades at $10 per share and has 10,000 shares outstanding has a lesser value than a company that trades at $50 with 1,000 shares outstanding.
OK, that’s all great for knowing how a stock’s price moves.
But what about determining what price is good or bad to enter and exit a trade?
There are four more things to pay attention to when you’re evaluating stock:
The Price-to-Book Ratio (P/B)
The P/B represents the value of the company if it was liquidated and sold today.
It is calculated by dividing the share price by the book value of a share.
The value should be low, meaning the stock could be below value.
The Price-to-Earnings Ratio (P/E)
The P/E can be thought of as how long a stock will take to pay back your investment if there is no change in the business.
In other words, it represents how much investors are willing to pay per dollar of earnings.
It is calculated by dividing the share price by the earnings per share.
The value should be high, meaning investors expect higher earnings growth in future.
The Price Earnings Growth Ratio (PEG)
PEG incorporates the historical growth rate of the company’s earnings.
It represents the stock’s value while taking the company’s earnings growth into account.
It is calculated by dividing the P/E by the annual growth rate.
The value should be low, implying you are paying less for future earnings growth.
Dividing a stock’s annual dividend by its price represents the interest on your money with the additional chance of growth through appreciation of the stock.
In other words, it shows how much cash flow you get for each dollar invested.
It is calculated by dividing the annual dividend per share by the share price.
The value should be high, because a high and stable dividend yield results in a paycheck even when prices drop.
All of this information applies to all stocks on the market, which begs the question…
What about Penny Stocks?
Penny stocks are common shares of small public companies that trade at low prices per share and can produce major profits for savvy investors willing to take on additional risk.
Penny stocks may not have earnings or dividend yields as stock price drivers.
They are more speculative than other securities, so they’re lower priced and have large potential for rewards if the company’s product is a hit.
To short penny stocks, it’s key to learn to recognize patterns of promotion and price movements.
When evaluating penny stocks, contract wins with bigger companies and new product announcements that could drive earnings later — these are keys to hone in on.
When it’s time to invest…
Determine your level of risk and build a portfolio that suits your circumstances and timing.
Using a combination of valuation methods provides a fuller picture of the real value of a stock.
When it comes to background information and researching a company, day trading software is key, but the news and your own research should remain priorities.
Stick to a plan and don’t be afraid to cut losses quickly.
No single method can stand alone as measure of a stock’s value!!
Using a combination of valuation methods provides investors with ways of looking at the real value of a stock.
There are clearly a ton of moving parts when it comes to the stock market…
And sometimes, even when all the stars align…
When you’ve done your due diligence…
And when you have a calculated conclusion of what SHOULD happen…
Something else happens instead. Do, the one thing you need to know for sure is that stocks are volatile and prices can change on a dime.
Beginning to build yourself a solid foundation of terminology and market dynamics is key to getting started in investing.
As you learn to develop your own strategies for evaluating stock, I will continue to share the principles that put me where I am today.
As I’ve said, the tools are at your disposal, but overall success from investing in penny stocks or any other securities comes largely down to the effort you’re willing to invest.
Editor, Penny Stock Millionaires