Margin account investing is a great way to really amp up the earnings of your portfolio without actually having to put more of your own money in.  You can borrow up to 70% of the value of an investing in a stock which means you only need to put up 30 cents on the dollar.  Of course there is added risk that naturally comes along with added reward but if you’re interest is piqued read the following on Margin Accounts.

What Is A Margin Account?

Margin accounts are setup to allow clients to buy and sell stocks on credit and requires them to pay part of the full transaction price.  The brokerage firm the client uses lends the remaining capital to the client and charges interest on the loan to the client.  The client is expecting to make much more money than the interest charged out on it, and therefore a little interest is not a deterrent for the added service the firm provides.

The word margin itself refers to the amount of money that the client herself has to put up.  The remaining amount is the loan provided by the brokerage firm.  There are two types of margin positions that can be taken by an investor; long margin positions and short margin positions.

Margin Positions

A long margin position is when the investor buys a stock using only a portion of their own money and borrowing the remaining amount from the broker.  There are specific levels of money that a brokerage firm is willing to loan out which is based on the selling price of the security.  Each quarter there is a document produced that lists the stock eligible for reduced margin.  These are generally stocks that have less risk and very liquid as such, they require you to only put up 30% of the total investment.  The following is a list of those percentages:

Taking a short position in a stock is selling a position in a stock that you don’t currently own.  This type of transaction is executed on the belief that the price of a stock is going to fall.  The terms of margin are the opposite when taking a short margin position because you are actually lending money to the brokerage firm because you technically sold a stock to them and they are paying you the proceeds.  To cover the risk in this situation though the client must put up more than the total value of the short sale.  The following is a list of the maximum loan values for short positions:

Margin Call

When the margined stock is purchased the account must maintain sufficient funds to cover the position value. The brokerage firm lends you money but you are also provided with the stock so the full value of the investment is contained within your portfolio.  However if the price of the stock goes down your investment total will be less than the loan amount.  In this case a margin call will be triggered.

Example Of A Margin Call

In the example shown above you would need to fund the account with an additional $70.30 immediately or have the position liquidated automatically by the brokerage firm.  That’s not something you want to have happen so it’s important to keep a good amount of money in your margin account and try not to come too close to the limits.

Using other peoples’ money to invest can lead to a rapid increase in profits but comes at an increased risk.  When using leverage always take care ensuring that your account won’t come anywhere near a margin call.  That type of situation could result in significant losses as the use of leverage amplifies the loss.  Although many penny stocks don’t use margin, there are still some junior companies that would be eligible in the sub $5 range that could be traded in a margin account.

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1. Margin Account Investing: Profiting With Other People’s Money
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So let’s talk about risk.

There are different kinds of risk when investing in the stock market. Some you can control and some you cannot. Investing in penny stocks is certainly a risky thing to do. However, as we’ve seen, investing in the overall market (index fund) can be fraught with risk as well.

In general small cap stocks are much riskier than a stable growing market, but in uncertain times they could present opportunities for growth where larger cap stocks are stock following the trend. This isn’t going to be a generalization, however many penny stocks are poorly corelated with index performance. So the overall market risk isn’t at play as much in a smaller cap company than the bigger ones with significant weightings in index funds.

Don’t get me wrong though penny stocks are risky! Their risk however would be evaluated differently than large cap companies.

#1 risk you can control is yourself and your money. You are the only one who determines the exposure you have to the market and individual stocks so your due diligence is always required!

Technorati Tags: Investing, penny stocks, risk

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9. e-Mail newsletter. They promise that *this* stock is going to be huge and go through the roof. Sounds pretty awesome. You only need to get out before everyone else does. That is not a game worth playing my friends. Again, good for ideas, but don’t trust them in the least, ignore them completely if you must.

8. The biggest gainer/loser of the day. One day run up in a penny stock could be a good thing, or an anomaly and the same goes on the down days. It might be a good way to find stocks that are moving, but find out what is behind the move before you decide it’s worthy of your money.

7. The tip your co-worker gave you. If your co-worker were a great stock picker he probably wouldn’t be your co-worker, he’d be your rich former co-worker.

6. String three letters together. Probably a bit absurd, but hey people have done crazier things. Typing three letters and seeing what turns up is just playing Russian roulette. It might be fun the time you make money, but there are more bullets than blanks in this gun.

5. Online forums. There are a lot of trolls and pumpers out there. You’re playing right into their hand if you blindly follow them.

4. Pure play commodities follower. You hear gold is going through the roof (or falling flat) so you invest in a junior gold mining company but are confused when you don’t see it matching the returns that gold is making. That’s because there’s a lot more going on there than you think. Time to brush up on your analysis skills. Price of gold is only one factor and depending on the company might not even be the biggest driver of value.

3. Your friend’s company. Your friend works for a bio tech firm that is publicly traded AND they’re curing cancer! Sweet, except your friend’s view of the company is generally not that of an investor but of an employee, and at worse it’s insider trading which is something you should avoid. So avoid this way of picking a stock.

2. Volumes. Volumes of shares traded can be deceiving and there’s a lot more I could say on the subject of volumes, but needless to say there is a lot more underlying to volume activity that you’ll need to know besides how actively it is traded. Namely, answer the “why” question.

1. Because I said so. First off, I would never ever tell you to go an buy a stock. I share with you some of the stocks I’m watching and track their performance, and even if you like them, it’s never a recommendation to buy. You will need to do your due diligence always.

There are no shortcuts, but if you want to learn how I pick my stocks, I can show you.

There’s even a special offer until the end of September too (find out more).

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This blog may be about penny stocks but penny stock investing is not right for every type of investor. That being said, it may be worth more consideration than they are usually given credit for. If you’re new to the idea of penny stocks, they are basically stocks with low market capitalization that are mostly considered speculative (aka: big gambles). There’s a lot of risk and a lot of reward. Penny stock are considered by some to be junk stocks and are full of cheats and liars. This is no more true than any stock trading out there today, and understanding the risks and opportunities will help in avoiding the junk and finding the gems.

Who should invest in penny stocks?
- If you have an iron stomach and are not afraid of risk.
- If you’re young and have money you’re willing to lose.
- If you have a substantial net worth that would permit you to take outsized risks as a result of an existing comfortable investment portfolio.
- People with the time and inclination to perform their own due diligence for investing in small cap companies.

How much should I invest in penny stocks?
The general rule for speculation is to keep it between 5% and 10% of your total portfolio value. This of course varies based on your own personal risk tolerance as well as the risk tolerance of your portfolio goal. No one would ever suggest that you put all of your savings into penny stock investing.

What penny stocks should I invest in?
There are certainly too many small cap stocks for one person to cover so it’s nearly impossible to evaluate all of the options when considering penny stocks for investments. It is usually best to choose a specific industry and begin to recognize the patterns of success. From there on, you can apply these success patterns to up and coming companies trading as penny stocks and determine whether they meet the profile. This type of success pattern can be based either on fundamental or technical analysis. There are some sites like this one, that try to pick out a few penny stock picks that you may wish to consider performing due diligence on to see if it is a match for your own investment portfolio. That being said, no website will tell you to go out and buy any stock. The ideas are for information and entertainment only. This is where the risk comes in.

What are the risks?
In a word, everything. Penny stock investing is rife with risk. This is quite natural as the rewards can be quite substantial. There are many companies out there that are hired on by companies to promote their stocks as good investments. Often times these types of promotions will line the pockets of the company owners and leave the retail consumer penniless. That being said, these types of promotion can still be useful in making money if you know how to properly execute on them. But in general, have the expectation that you will lose 100% of the penny stock investment. If you’re not comfortable with that idea then the risk may not be suited to your investing style.

The deal of the century happens every week
So if you’ve made it this far in the post chances are you’re thinking that you might want to take a look and putting a little money into penny stocks. It’s a great idea IMO. But it’s best not to rush into any investment and penny stocks are no different. More than any other market you will hear of penny stocks exploding 120% in a day or 400% in the past month. Don’t let these big numbers make you feel you’re missing out. Focus yourself on the stocks you’re interested in pursuing and once you have a plan then execute it.

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Investopedia has an article on The Dark Side of Bulk Buying which is not necessarily about investing but it’s about where you money goes if you’re not investing it.

Adam Hewison explains why diversification doesn’t work in today’s stock market environment. It’s a compelling case considering the performance of indexes the past few years.

Here is a Bloomberg article discussing IMF credibility based on an audit. There’s politics at work at the IMF no doubt. “The policy conclusions from International Monetary Fund research don’t always follow the underlying analysis, thereby potentially harming the institution’s reputation, according to an internal audit.” Read on…

Maybe some day Financial Advisors will be more than salespeople. Rob Carrick talks about it in an interesting article: Financial advice business needs to grow up.

The Sino-Forest story is fascinating in that mysterious kind of way. Of course for investors it’s been more of a horror show. The Blunt Bean counter has a suggestion for those paying the price on unvetted media coverage.

Technorati Tags: canadian stocks, finance, news

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This course goes deeper into subjects than any post at the Canadian Penny Stocks blog and offer a raft of bonuses videos that get you to the heart of how I come up with posts and penny stocks for the blog and for my portfolio.

If you’re as interested in penny stocks as I am you’ll be interested to learn more. For a complete description of what you’re getting there, check out the site at investingcoursesonline.com for the full deal.

There’s a pretty great offer on the course. While the introductory offer itself makes it cheaper than any other video training around, if you couple that with our Questrade offer you will actually make $3.00 by joining the video training course.

The other great benefit of joining this course is the community. The course is setup in such a way that it allows participation by those who take the course, even though it’s completely self-paced and instantly available. By delivering the course this way, your learning doesn’t stop after you’ve finished the videos.

You get the benefit of an exclusive community of like-minded investors on the same path to profiting in penny stocks. Learning in community is always a good thing.

Technorati Tags: picking profitable penny stocks

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I’ve highlighted the channel so you can see how the resistance level was being tested and failing all along the way, but the support level wasn’t getting the tests as often which would be considered an overall bullish trend.
So what happened to the bullish trend?
Right around the same time the technical traders were expecting a correction, the fundamental traders received news of chaos and instability in the world and wanted out. So it was a double dose of bearish sentiment happening to drive the stock market down 600 points this past week.

The bad news beyond the fact that we’re down 600 points is that the chart has fallen through the support of the up channel trend. It looks like there’s a little support at the 13,400 level and then more support at 13,200, but either way you slice it, there appears to be more room for declines in the TSX in the short term.

The fundamentals seem to be supporting more downward movement as well, considering the devastating effects of the earthquake and tsunami. Our thoughts are prayers go out to those people affected by those events.

Technorati Tags: stock market, Technical Analysis, tsx

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Apps:
This slide really explains why apps are where you need to be looking in tech:

Chances are that you own a smart phone. If you don’t own yet, brace yourself because in a short while the barebones mobile phone will be going the way of the dodo. But what you’ll find on your Blackberry, iPhone, or Android smart phone is a wide variety of apps that come bundled with the phone, and others that you can download (at a cost).

This type of software marketplace is breaking down marketing walls and giving end users instant access to all kinds of great software products. There are millions more customers getting online every year and they are eager to spend money to get the apps that are useful for their everyday lives.

Finding the investment opportunity
The majority of app companies are small startups and aren’t publicly listed. However, there are companies that you can invest in that are in this market. Poynt and Intelligent are two examples. Poynt is a good example of one of these companies that is doing it right on all the different platforms. Many companies will be looking to deliver software to only the Android platform or maybe just the iPhone, but when you see a company like Poynt positioning themselves cross-platform they are positioning themselves for success no matter which smart phone wins the race.

Social Media:
I will almost put a guarantee that you have a Facebook account. Canada has one of the highest penetration rates of facebook users in the world. They even made a movie about the company. This type of revolution is truly generational and social media is this generation’s personal computer. Companies are fast in trying to tackle social media in anyway they can to figure it out. But in reality, most of them do it poorly.

There is a great opportunity for small companies to help out their economic bretheren and show them what social media is all about. A lot of social media companies are privately owned however there are some small cap social media companies that are being traded.

What To Look For In A social Media Company
Social Media companies can come in many different flavours and have different metrics for success. Social media providers like facebook and twitter provide the base platform for social interactions to occur. These sites are all about eyeballs. The more eyeballs on the page the bigger success they will be. There are other companies like Zynga (think Farmville) that use the platforms to build focused interactions for people using the social media sites. Then there are companies that provide the social media consulting at exorbident rates to other companies that need help trying to communicate to the masses using this new technology.

Wrapping Up The Tech
The technology industry is incredibly fast moving. Many situations it’s adapt or die and the pace will only continue to accelerate as people continue to rely on their smart phones and social media for running their lives.

Hope you’ve enjoyed this brief little discussion on tech. If there are some companies that you know of that are tech based and in these two fields they are likely worth researching. Feel free to post them here for others to check out as well.

You can follow me on twitter at cdnpennystock. That’s where I do my social media thing.

Technorati Tags: penny stocks, technology stocks

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Adam Hewison has a great explanation of why gold is where it is and where it is going. It’s firmly grounded in technical analysis which is a good thing for a commodity like gold. Here is the video on gold:

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source: wheat_in_your_hair

Conflicting Interests
When you listen to any analyst you have to keep in mind that they have their best interest in mind. If they are long a stock and get in front of a few hundred thousand people and tell them all it’s great and everyone should go out and buy stock for themselves and their grandmothers then there could be enough groundswell to move the stock higher. Therefore they have just actively participated in moving a stock higher because of their own self-interest. This is a red-flag.

Disclosure in Penny Stocks
Disclosure becomes more important in penny stocks because of the nature of the price and the volumes traded. Some small cap stocks trade in very small volumes and therefore can have a big difference in the bid/ask spread. So if someone talks about how great a particular penny stock is, then they may have the opportunity to influence the price much easier than a multi-billion dollar market cap stock.
Penny stock newsletters will have a disclosure statement on the bottom of their emails that will outright say that they are getting paid to profile these companies and suggest to the reader that the price is moving higher.

What Makes the Canadian Penny Stocks Blog Different?
The Canadian Penny Stocks blog doesn’t accept payment from any company to feature them on the website. All of the companies appear as a result of interest in the company as a result of fundamental or technical analysis. The blog will always try to disclose ownership positions in shares but it does become tricky in a blog format, since some stocks will be traded in and out of positions and the post remains on the blog.
There is a disclaimer on this blog that indicates that the information provided is not meant to be advice, nor a recommendation to buy or sell a stock. You should always be diligent with your sources of information. I hope that you can find the blog as a useful source of information to begin or further your research in to stocks and investing.

This blog will from time to time post information on products that have been personally vouched for and the site may be paid for the referral to those products. For example I could not have been able to perform a review of the Questrade platform without being a member myself. I continue to be a happy member, however may be compensated in a small way if you sign-up and become another happy member like me.

It’s unfortunate that penny stocks can get a bad rap, because if you have the stomach for high risk investing, there is some great money to be made discovering great small companies with great ideas and potential. The Canadian Penny Stocks blog will continue to strive to avoid the hype of penny stock promotion and provide some ideas and disclosure.

Technorati Tags: canadian penny stocks, penny stocks, risk

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