The Landshark Instructor Team
It's no secret the idea of penny stocks is alluring and it's been made even more so with Jordan Belfort and The Wolf of Wall Street movie. It's the lure of quick money that attracts people, and I mean hey, who doesn't like quick money? The issue is that many of these companies rarely profit, if at all and have very low float (or shares) so they can be easily manipulated. This recent run from $4.43 to over $85 (at the time of posting) on Dry Ships is one of those rare case examples of a winning penny stock trade. There's just a one problem......well, there's a few.
There is one main reason (at least we believe) that people are attracted to penny stocks: a lack of investing capital. The stories you hear of people doubling, tripling their money sounds great, to the untrained investor. The issue is that this world of penny stocks is highly manipulated by stock promotion companies, brokers and traders alike, all with one goal in mind: taking your money! Very few institutions (think Mutual funds, ETF's, Hedge Funds and Banks) trade in the penny stock markets. Why? Because it's very hard to get shares and when you trade with any large amount of capital getting a position on them is hard to do.
Now everyone is reading this blog because you want to learn about investing and you want to make money, however, there is a smarter way to go about it. The Landshark Education programs take into account the account size and risk tolerance of all investors, not just one sector. So if you are trading with a smaller amount of capital and think that penny stocks are the way, think again. So when you have a small account you can't necessarily be the 'Shark' however, you can be the Remora fish that follows the sharks (the institutions) and invest along side them, something we teach in the Remora Options Program.
Above is a screen shot of the major holders of Chipotle shares. Notice that the majority is institutionally held. This typically provides a better 'trending stock' with less volatility and a more predictable trading pattern. Not to mention, a stock like this has options, which, if you're investing with small amounts of capital is a great option to penny stock trading. So you get these penny stocks like DRYS and you see others who may have caught a piece, but you have to ask them and yourself, is it a repeatable process? The answer is likely no, not without large institutional holders who can control the overall moment of the stock.
Lack of volume creates a sloppy price chart which makes it near impossible to use technical analysis with.
These stocks never really trade with consistent volume. One minute they're hot the next they're not, which makes finding areas to sell and buy on them hard. At Landshark we preach the concept of finding the PTA (Potential Trade Area) ahead of the trade, and with great accuracy. With penny stocks this is near impossible to do. Below is a 3 year and a 1 year daily chart on Dry Ships.
So let's assume we think this stock is overvalued at the current time and you want to bet against them by shorting them. Good luck. Aside from SEC rules on penny stocks finding shares to borrow becomes another task by itself, many times, leading traders to use less than great brokers to short the shares. A recent example of something like this occurred on KBIO where it rallied out of nowhere and traders began to short it. The only catch? The stock, with very little volume, was bought up creating a short-squeeze and artificial buying, something we could be seeing at current time with DRYS.
Now obviously this was great for the people that bought the stock and great for those who bought DRYS. All of this goes back to the old concept of what the Wolf of Wall Street relied on: The idea that one stock trade will make you rich so you will never have to work again. Is it possible to make money in the market from these stocks? Sure, it happens, but more than not it's a long-shot at best and it's certainly not a repeatable process of investing.
So if you're new to investing in the markets or have dabbled as a hobby consider sticking to well-known listed stocks, futures and options markets where you have larger institutional players and real, viable liquidity. The initial thrill of seeing this is great, no doubt, but no professional trader, hedge fund manager or mutual fund manager makes their profits from one trade, it's a series of great trades over the course of the year that make a portfolio great. Learning to manage your portfolio in this manner can be done by first understanding what your goals are (growth, income, wealth preservation) and then second by learning how to properly read a price chart. Again, all products in the global markets contain risk, it's just that certain ones make it easier (in our opinion) to manage risk.
If you would like to learn more about the Landshark Education programs or attend a trading workshop in a city near you click here.