The Penny Share Millionaire

Jacques Magliolo

• Publisher: Business Expert Press
• Year: 2017
• Print ISBN: 9781631577826
• eBook ISBN: 9781631577482
• Topic: Business
• Subtopic: Finance
• Index: Business

So, you're interested in becoming penny share millionaire? The simple answer is: Follow trading rules and you can live your dream. Trading takes courage and an understanding of market psyche. In a world fraught with economic and political upheaval, it becomes essential to plan to find lucrative shares while minimizing downside risk. This book shows you how to research, assess and discover profitable shares.

CHAPTER 1

General Terms, Warnings, and Other Info

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”

—William Feather (1889–1981), an American Publisher and Author

Definitions

What Are Penny Shares?

Shares that are low-priced and have a small market capitalization are known as penny stocks. This doesn’t mean that these shares cost only one cent each? The US Securities Exchange Commission (The SEC) has a set of rules pertaining to penny shares (See Appendices), but it is sufficient to state that a penny share can be defined as:

Any stock trading at or under US$5.

Actually, depending whether you are assessing the London Exchange or the Johannesburg Securities Exchange (JSE), the terms are interchangeable and must be noted that some confusion is made when an Exchange is denoted as a “Small Cap Exchange” such as the JSE’s Alternative Exchange (AltX) or the London Stock Exchange’s Alternative Investment Market (AIM). Most shares on the AltX and AIM trade above what traders consider as penny shares.

Therefore, it is more accurate and technically correct to state that a small-cap or microcap stock is based on their market capitalizations, while penny shares are deemed to be viewed on price.

While definitions vary across different world exchanges, the SEC states that stock with a market capitalization between US$50 and US$300 million is a microcap.

At the outset, let me state that trading penny shares is risky. Many novice traders have the mistaken opinion that it is easier to make profits on a penny share than on a blue chip.

The logic is as follows:

It is easier to see a share price double from two cents to four cents than it is for a US$100 to double to US$200.

Except that a share that is trading at two cents may never rise to those levels. Take for instance, a company with the follow statistics:

• Share price: two cents

• Shares in issue: 500 million

• Attributable profit: US$100 million

• Price earnings: 10 times

For the company’s share to double, the company would have to see the following happen:

• The company would have to double its profit to US$200 million; or

• The company’s price earnings (PE) ratio would have to double to 20 times.

Calculations:

A) Fair Value

• SHARE PRICE = PE × EPS

• THEREFORE: SHARE PRICE = 10 × (US$100 million divided by 500 million)

• THEREFORE: SHARE PRICE = 10 × 0.2 cents

• THEREFORE: SHARE PRICE = 2 cents

For the share price to double:

• PE RISES to 20 times:

○ PE = SHARE PRICE DIVIDED BY EPS

○ PE = 4 DIVIDED BY 0.2

○ PE = 20 TIMES

Both are extremely unlikely.

Benefits of Penny Share Trading

If you have a portfolio of US$20 000, and wish to invest 10% in DAY trading opportunities, you would be limited by the effect of brokerage, tax, and other securities costs.

As such, US$5000 per trade would be the least amount to be effective in trading. This amount is not a sufficient spread of risk in speculative situations, but investing in penny shares, you create a better spread of risk and achieve a diversified portfolio.

Note that if you trade regularly, even if your portfolio is a small amount of funds, you could be classified as a share trader and pay full tax rate of 45% or more, depending on the countries’ tax rate.

Disadvantages

Over time, we have witnessed listed companies, with poorly traded shares, suddenly rocket as corporate announcements are made of, among other, restructuring and new contracts being granted. There is always the potential that traders will see their investments rise to unbelievable levels.

There is the possibility of finding undervalued situations and to position the portfolio for an upswing in a sector or overall market. Traders under such conditions must inhibit patience, but also have the funds to wait for the investment to perform as expected. Funds tied into a potential gain without analysis is an opportunity cost.

Remember the Axiom: A Successful Trader is one who has knowledge and Discipline.

Trading on Media and Other Market Noise

The key to any successful trading strategy is to understand how leading and lagging indicators work. For instance, if the Exchange is the Leading Indicator of the economy, then any environmental factor that doesn’t alter this fundamental principle is the Market Noise.

Environmental Factors:

• Politics, including the influence of labor and labor unions

• Economics, including cross border trade

• Business, including mergers and acquisitions

• Technology

If one of the above factors moves a market or share, then it is Market Noise and the share may be deemed to be a trading opportunity. It must be noted that penny shares and othe...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright Page
• Dedication
• Abstract
• Contents
• Foreword
• Acknowledgment
• Introduction
• Chapter 1 General Terms, Warnings, and Other Info
• Chapter 2 30 Years of Observations
• Chapter 3 Are You Suited to Penny Share Trading
• Chapter 4 Strategy
• Chapter 5 Trading Rules
• Chapter 6 Combining Fundamental and Technical Analysis
• Chapter 7 Timing Your Trades
• Chapter 8 Entry and Exit Points
• Chapter 9 The Penny Share Scalper