Another Publication of eBookWholesaler Copyright 2002 Donny Lowy Proudly brought to you by DJP SPECIALTIES Email Recommended Resources Web Site Hosting Service Internet Marketing Affiliate Program Table of Contents Preface --- --- P.2 Chapter 1 - What is a Penny Stock? --- --- P. 8 Chapter 2 - The OTC Market --- --- P. 11 Chapter 3 - The Pink Sheets --- --- P.19 Chapter 4 - Research Tools ---- P. 27 Chapter 5 - Financial Fundamentals --- --- P.55 Chapter 6 - Corporate Developments --- --- P.75 Chapter 7 - Turn Around Situations --- --- P.96 Chapter 8 - Special Situations --- --- P.107 Chapter 9 - Insiders --- --- P.116 Chapter 10 - Research --- --- P.129 Chapter 11 - Investor Relations Firms --- --- P.165 Chapter 12 - Negative Situations --- --- P.180 Chapter 13 - Investment Strategies --- --- P.189 Conclusion – P.212 1 Preface This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the author is not engaged in rendering legal, accounting, financial, investment, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. The information in this book is only for educational purposes. Welcome to the most comprehensive system on penny stock trading. The goal of this book is to supply the novice investor along with the experienced professional equity trader with all the information he or she will need to be educated in the realm of penny stock trading. This book can be used as an educational totem for those investors who were always curious about trading in penny stocks but did not know where to start. This book will guide the investor by explaining the various concepts and terms in an easy to understand language. Besides its usage as an instructional book for those who have never invested in a penny stock, this book will also serve as a manual for the veteran trader. As an investor you will be familiarized with all the concepts behind micro cap investing. You will learn what the difference between a reverse merger and a reverse split is. You will be presented with many new terms and concepts. Some of those terms will be familiar since they are used in connection with investing in the broader market while other terms will be specific to penny stocks. 2 In addition to the various terms and concepts you will be able to benefit from another facet of this book. You will be able to personally benefit by using this book as a manual on penny stock trading. This book will teach you proven strategies that work when it comes to penny stock investing. Instead of repeating shallow, but nice sounding ideas, the concept of buying low and sell high, you will be given substantial strategies that are extremely effective when done correctly. You will have at your disposal strategies that only experienced traders know. The strategies in this book have been collected from first hand experience and from the collective experience of numerous experienced penny stock investors. We all know the frustration we encounter upon spending a few weeks reading a book on investing and then being left out to dry when we are dealing with a real life situation. After finishing the book we feel excited since we have just read 400 pages telling us that the key to investing is following a few simple ideas. All we will need to do is read the daily business newspaper. The investment mass media publications will have us believe that once we have written down their simple ideas and have a newspaper handy we will be on our way to making our first million in the market. Unfortunately this approach to investing is as far from the truth as possible. How many times have we read a strategy in an investment book only not to be able to apply it in the real world of trading? The reason that we often cannot apply the strategies we read in an investment book is that most of the strategies we see and hear on the evening news are based on 3 theory and are not proven outside of the classroom. Many theories only work in a perfect world where the market always responds the way it is supposed to respond to an event. Among the popular misguided theories is to only look for companies with solid earnings. But reality has shown us that this theory does not hold its weight in the market. How many times has a company released positive earnings and still experienced a loss in its market value? On the other hand how many stocks continue escalating in value in light of the fact that they do not have any earnings? If you knew that a company was going to earn a billion dollars in six months would you let yourself be preoccupied with the fact that it is loosing money now? The simple fact is that there are many other investing rules which are more accurate than the frequently repeated advice we hear thrown out every day by analysts and the popular media. Next time you hear someone tell you that “all you need to do is buy a stock and hold it” ask him how long he plans on holding the next horse and buggy company. The point is that once a market for a product becomes eliminated then the companies involved in that segment will either have to change direction or will shortly be bankrupt. Now you might be wondering if there is a method altogether for investing or if you should just throw darts at the financial pages and see on which stocks the darts fall. Well, before you give up investing and head for the black jack tables read on. There is a method to the game. And the method consists of many smaller steps which when followed properly will lead on to successful investing. This book will provide you with the broader method and the small steps. If you follow the advice and stick to the enclosed discipline you will learn allot and might 4 even become substantially rich from your investments. Why penny stocks? This book is focused on penny stocks. While there are many different types of investing one can partake of the author believes that micro cap investing is the most rewarding one. Micro cap investing has the potential to yield huge gains in a short period of time. It is very common for penny stocks to move upwards of 25% in any given day. Keep in mind that the adverse means that they can also move down 25% on any given day. The nature of penny stocks makes them both very rewarding and very dangerous. Then why invest in them at all? Because in this world the more risk you take the more reward you are posed to gain. If you put your money in a bank account you will eliminate all risk short of a total banking melt down. You will always be able to access your money regardless of the general condition of the market. A bank account seems like the perfect type of investment vehicle until you realize that the interest you earn hardly keeps up with inflation after you have paid taxes. You can then choose to increase your tolerance of risk and invest in a bond with relative security and safety. You will then have peace of mind but also a very small return on your investment. If you decide that you are willing to risk your money you can enter the security arena via a mutual fund or the purchase of a security like General Motors and hope that by the end of the year your investment has grown by 20%. You have increased your risk and have increased your return potential at the same time. By investing in an established mutual fund or 5 company you have both minimized your risk and potential at the same time. But what if you wanted the opportunity to double or triple your money in a month? You would be hard pressed to find a stock trading on one of the larger exchanges that had the potential to double in a month. Now keep in mind that if a stock existed which had the potential to double in a month it would also have the potential to lose all of its value in a month. But what if you decided that knowing the huge risks you were about to undertake you still wanted a crack at buying stocks that could double your money in a month. You would find those stocks among the ranks of the penny stocks. These companies would be small companies with small operations but large aspirations. These companies would be driven by a dream and the necessary ambition to beat the odds. The odds would be stacked against them in many aspects. A majority of these companies will never progress beyond the development stage. But the slim percentage of companies that do beat the odds can experience dramatic growth in their stock prices of upwards of 10,000% in a year. So is it worth investing in penny stocks? The answer is yes and no. You will have to look within yourself and discover if you have the ambition and persistence to learn everything there is about penny stocks. This book should prove to be more than enough ammunition to beat the odds and discover the right next penny stocks. But it is up to you to decide if you have the courage and ability to take the large risks associated with investing in them.