Of all the investment vehicles out there, few offer greater potential than penny stocks. Yet penny stocks are not for the faint of heart.
That's why a clear understanding of how to buy penny stocks is essential before diving in to the market.
You see, behind the potential for large gains is the indisputable fact that many of today's most dynamic companies were once little more than penny issues themselves.
That means that at least a few of tomorrow's market leaders are currently lurking among stocks listed on the Over-the-Counter Bulletin Board (OTCBB) or the so-called "Pink Sheets."
Penny Stocks That Hit it BigAs proof, consider just three examples.
These are companies that have risen from true penny status to positions of prominence handing early and enduring investors almost unimaginable profits:
- Green Valley Coffee Roasters Inc. (Nasdaq: GMCR) - Thanks to four splits, 100 shares purchased in October 1998 at $4.62 a share ($462) is now 2,700 shares priced at $20.45 a share, worth $55,215. But the stock actually hit $107.99 in September 2011, making it then worth $291,573.
- Bally Technologies Inc. (NYSE: BYI) - Two splits turned 100 shares of this gaming-machine maker purchased at $1.69 a share ($169) in May 2000 into 400 shares, now priced at $45.98 and worth $18,392.
- Jos. A Bank Clothiers Inc. (Nasdaq: JOSB) - You could have purchased 100 shares of this clothing retailer in November 1999 at $2.78 a share ($278). After four splits, that position has turned into 351 shares now priced at $41.29, worth $14,492.79. At the height in May 2011 those shares were $56.05 each, worth a total of $19,673.
It doesn't include the many penny mining stocks that exploded upward with skyrocketing resource prices or "fallen angels" like Bank of America (NYSE: BAC). A complete listing of such stocks would go on for pages.
Of course, a listing of stocks that have gone from penny status - defined by the Securities and Exchange Commission (SEC) as "a very small company priced below $5.00 per share" - down to zero would be far, far longer. That's why these stocks are among the riskiest on the board.
That's the challenge for investors - avoiding the big losers in the penny stock market.
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Don't Let Mary Schapiro Tread on Your Money Market Funds!
SEC chairman Mary Schapiro announced last week that she has set her sights on your money market funds.
I'm sorry, but that makes no sense at all.
Losses on money market fund investments have been trivial in the almost 40 years they have existed.
What's more, they haven't added to the tottering instability of global finance. Not one wit.
Her attempt to come down on money market funds is nothing more than crony capitalism at its most unpleasant.
The regulators, who under the Obama administration simply like regulating, are just in cahoots with the big banks, seeking to eliminate their competition.
In this case, what the banks would like to do is simply turn back the clock.
After all, in the 1960s, banks had a very easy life, because interest rates were regulated.
The old adage was "3-6-3" banking - borrow at 3%, lend at 6% and be on the golf course by 3 p.m.!
It was a good deal for the bankers but not such a good deal for those forced to lend to the banks at 3%--especially as inflation rose in the late 1960s to 4%, 5% and higher.
In fact, it was no wonder that when I first opened a U.S. bank account in 1971 that I was rewarded with a full set of bone china! Attracting savings was THAT profitable!
But all of this changed with the establishment of money market funds.
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Dodd-Frank Isn't Legislation; It's a Comedy
In last week's Insights & Indictments, in my commentary on all the letters sent to the SEC about the proposed Volcker Rule, I not-so-casually commented that the Volcker Rule "shouldn't exist at all."
And then I called the parents of the Volcker Rule, the Dodd-Frank Act, a "joke."
Well, by the amount of comments I got back from I&I readers - right now, there are about 95,000 of you (and counting) - you'd think I was talking about something really controversial, like contraception, for heaven's sake.
Talk about passionate!
I understand that people get passionate about contraception. After all, without all that passion, we wouldn't need contraception.
But me being passionate about the birth of the Volcker Rule, which I said should never had been conceived, apparently caused a lot of to you think I crossed some moral line.
Not me! I'm not one to ever say anything controversial! And I'm certainly not the kind of guy to wade into the contraception debate.
But, if I was, I'd be a strong advocate for it.
The unwelcome birth of the Volcker Rule is a good example...
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Why the Volcker Rule is a Cop-Out and a Joke
Right now everyone's talking about the Volcker Rule.
For heaven's sake! What's the big deal? After all is said and done, there is only one real problem with it (and I'll get to that in a minute)...
The 300-page draft Rule, named after its champion architect, former Federal Reserve chairman and inflation-fighting icon Paul A. Volcker, is an addition to the ever-evolving masterpiece of legislation (yes, I'm being sarcastic) known as the Dodd-Frank Act.
Now, draft SEC rulemaking and regulatory actions are first submitted to the public for "comment." The SEC collects all comment letters and posts them on their website.
Well, wouldn't you know it, this draft (some might call it "daft") Volcker Rule has caused a flurry of letter writing; letters were due to the SEC by no later than this past Monday evening.
All in all, this august (not the month) regulatory body received 241 detailed comment letters (that's a lot of comment letters) and an astounding 14,479 mostly form letters, as well.
Almost all of the form letters to the SEC, many of which were "personalized" by submitters, were strongly in favor of the Volcker Rule and called for strengthening it and not watering it down by allowing any exemptions.
How do I know that? (No, I didn't read them all.) They resulted from an e-alert campaign to activist supporters of the Americans for Financial Reform group and Public Citizens, who posted appeals on their websites.
Other notable comments in favor of the Rule, and weighing-in in more detail, came from Paul Volcker himself and Senators Carl Levin (D-MI) and Jeff Merkley (D-OR), who championed the Volcker Rule in the Dodd-Frank legislation and in their comments called the draft too "tepid."
The lengthiest comment letter in favor of the Rule (and of tightening it significantly) came in the form of a 325-page love letter from the Occupy Wall Street movement.
However, of those 241 detailed comment letters, most of them came from detractors.
Detractors like individual banks (who normally let their dogs and lobbyists do their biting) and industry groups, such as the Securities Industry and Financial Markets Association (Sifma) and the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.
Powerhouse law firm Davis Polk was itself drafted by several banks and Sifma to help draft at least 10 letters on behalf of the cause ("cause" banks want to keep making big bonuses).
Detractors of the Volcker Rule warned of dire consequences for American capital markets, American corporations, the American economy, the world, and the universe beyond even our own little constellation, if the Rule is allowed to curtail their most coveted and conscientious shepherding of their clients' best interests.
Prop Trading, Market Making and the Volcker RuleThe Volcker Rule comes down to this: To continue reading, please click here...
The New Money Market Fund Rules You Could Face
High-Frequency Trading Could Cause Another Flash Crash
The threat of another flash crash caused by high-frequency trading is as great as ever.
And the next flash crash could be much worse than the one that shocked investors in May 2010.
Although the Securities and Exchange Commission (SEC) has taken some steps to prevent another flash crash caused by high-frequency trading (HFT), some experts question whether the additional disclosure and "circuit-breakers" designed to prevent big, sudden price moves will make a difference.
"Those things won't prevent another flash crash - they can't," said Money Morning Capital Waves Strategist Shah Gilani. "All they will do is soften the move."
The real issue, Gilani said, lies with the computers that execute the trades - thousands of them in milliseconds.
HFT has changed the nature of the stock market since these trades now account for between 60% and 70% of the transactions on the U.S. stock exchanges.
"You can't stop a flash crash unless you stop the computers from doing what they're programmed to do. And that's not being addressed," Gilani said. "The SEC is looking at keeping the ship from sinking, not stopping it from hitting icebergs."
HFT's heavy volume and high speed made it the prime suspect in the flash crash of 2010, when the Dow Jones Industrial Average plunged more than 600 points in five minutes, before recovering almost as quickly.
Mini Flash CrashesSince then, the frequent occurrence of mini flash crashes - when a single stock or exchange-traded fund experiences a steep and rapid drop in price that quickly reverses - have served as nagging reminders of the vulnerability of the system to such events.
"It's like seeing cracks in a dam," James J. Angel, professor at the McDonough School of Business atGeorgetown University told The New York Times. "One day, I don't know when, there will be another earthquake."
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By Yanking the Teeth Out of Dodd-Frank Act Ratings Rules, SEC Blunts Hope for Real Financial Reforms
Make no mistake: The Dodd-Frank Wall Street Reform and Consumer Protection Act is a slippery political football.
But this early attempt at reform is actually just the kickoff for a political skirmish that will pit legislators, lobbyists and other hired guns against one another on the post-financial-crisis gridiron.
These ongoing reform efforts will turn into a long affair whose outcome is far from certain.
But investors can bet on this: The millions of dollars in lobbying money that's thrown at legislators every year in an attempt to influence the regulatory rulebook will certainly influence that outcome.
To understand the risks that a lack of reform resolve brings, please read on...
GM's IPO Filing Reveals Challenges That Could Discourage Investors
When General Motors Co. filed registration papers for an initial public stock offering (IPO) on Wednesday, it also revealed the formidable challenges it faces – some of which may give pause to investors considering taking a stake in the venerable automaker. The 734-page document GM filed with the Securities Exchange Commission (SEC) paints a picture [...]
Goldman Joins Chorus of Big Banks Reporting Weaker Earnings
Goldman Sachs Group Inc. (NYSE: GS) joined a chorus of big banks reporting weaker earnings for the second quarter as a weakening economy led investors to refrain from making deals.
Goldman's earnings plummeted 82% in the second quarter, hammered by the investment bank's settlement of Securities and Exchange Commission (SEC) fraud allegations and the U.K. tax on bank executive bonuses.
Strong trading and bond underwriting had bolstered the company's first-quarter results. But markets began to gyrate in April, and investor nervousness increased after the "flash crash" in May. Volatility has continued to rock the markets throughout the summer with investors' ongoing concerns about economies in Europe and fears that the U.S. recovery might be stalling.
What Really Caused the Stock Market 'Flash Crash'
Just when you thought it was safe to get back into U.S. stocks, you think you see a shark.
If you are searching - like the regulatory lifeguards and all the political beach bums - to pinpoint and kill the menacing shark that took a huge bite out of investor confidence when the Dow Jones Industrial Average tanked 1,000 points in a just a few minutes late in the day on May 6, don't bother to scan the horizon looking for the dorsal fin of some lurking predator.
The threat you fear isn't under the water: It is the water.
We're talking about market liquidity.
For the full story of the stock-market flash crash - and for some cautionary steps to take - please read on...