Lesson #3:

Fundamental Analysis

Performing due diligence on penny stock trading tips is very important to understand the share structure and the company behind a penny stock, so you can avoid troublesome penny stocks that have little chance of delivering a profitable trade.

The Over The Counter Bulletin Board and OTC Markets are both quite useful sites for obtaining share structure and company information regarding penny stocks.  Reading United States Security and Exchange Commission filings is also a very worthwhile way to develop an understanding of a penny stock company, if a company files with the Security and Exchange Commission (only ones that trade on the Over The Counter Bulletin Board are required to).  Finally, the aforementioned message boards and Google searches can quite helpful when trying to uncover penny stock companies and players behind penny stock companies that have a history of scamming investors.

The following are some of the terms that you need to familiarize yourself with to properly understand penny stocks:

Outstanding (O/S), Authorized (A/S), Restricted Shares:  Outstanding Shares (O/S) are the number of shares currently held by investors, including restricted shares owned by a company’s insiders and major investors, as well as those held by the public.  Authorized Shares (A/S) are the number of shares that a company is authorized to issue per the vote of a company’s shareholders.  A major red flag is when a penny stock has a lot more Authorized Shares (A/S) than Outstanding Shares (O/S), as it usually indicates that a company is planning on selling shares and diluting their stock value.  Restricted Shares are shares owned by insiders and major investors that cannot be sold on the open market until a specified future date.

Market Capitalization:  Market Capitalization consists of the total dollar market value of all of a company’s Outstanding Shares (O/S).  Market capitalization is calculated by multiplying a company’s Outstanding Shares (O/S) by the current market price of one share.  If a company has an excessive Market Capitalization when compared to its revenues, it is an indication that the stock is overvalued.

Float:  Float is the total number of shares publicly owned and available for trading.  The float is calculated by subtracting Restricted Shares from Outstanding Shares (O/S). For example, a company may have ten million outstanding shares, but only seven million are trading on the stock market, because three million are held by insiders and restricted from sale. Therefore, this company’s float would be seven million.  Stocks with small floats tend to be more volatile and move more quickly than those with larger floats.

Reverse Split (R/S): A Reverse Split (R/S) is a stock split that reduces the number of outstanding shares and increases the per-share price proportionately.  For example, if a company declares a one-for-ten Reverse Split (R/S), then a ten cent stock will be worth $1.00 after the Reverse Split (R/S), but the number of shares held by investors will be reduced by a ratio of one share for each ten shares they held prior to the split.  If one held 10,000 shares prior to the Reverse Split (R/S), they will hold 1,000 shares after the Reverse Split (R/S).  While there are legitimate reasons to do a Reverse Split (R/S), more often than not, when a penny stock company does a Reverse Split (R/S) to its stock, it is bad news for investors in the stock.  Unless, a penny stock company has an outstanding future with growing revenues, additional shares will likely be issued in the months and years after the Reverse Split (R/S), and the stock will eventually trade down sharply over time.

Reverse Merger (R/M):  A Reverse Merger (R/M) is the acquisition of a public company by a private company, allowing the private company to bypass the lengthy, complex, and expensive process of going public.  This is generally considered to be a good thing for a penny stock company that is taken over by a private company, as it increases shareholder value, especially if the private company boasts good financials and revenues.  However, beware of the dreaded Reverse Split (R/S), as many reverse mergers are followed by reverse splits.

Now you are ready to begin learning penny stock trading strategies that successful penny stock traders use to make money trading penny stocks.

Lesson #2:

Finding Penny Stocks

Lesson #3:

Fundamental Analysis - Performing Due Diligence on Penny Stocks

Lesson #4:

Successful Penny Stock Trading

Lesson #5:

Setting Up a Stock Trading

Lesson #6:

Understanding Level II Quotes

Lesson #7:

Placing a Trade

Lesson #8:

Chart Setups

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