Penny Stock Conspiracy


What Does Micro Cap Mean?
Companies with market capitalizations between $50 million and $300 million.

What Does Small Cap Mean?
Refers to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion.

 What Does Russell 2000 Index Mean?
An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small cap stocks in the United States.

What Does Russell Microcap Index Mean?
A capitalization weighted index of 2,000 small cap and micro cap stocks that captures the smallest 1,000 companies in the Russell 2000, plus 1,000 smaller U.S.-based listed stocks. The broad index is designed to present an unbiased collection of the smallest tradable securities that still meet exchange listing requirements, so over-the-counter (OTC) stocks and pink sheet securities are excluded. The Russell Microcap Index is recalculated annually to prevent growing stocks from distorting index performance, and to include new entrants.

What Does Pink Sheets Mean?
A daily publication compiled by the National Quotation Bureau with bid and ask prices of over-the- counter (OTC) stocks, including the market makers who trade them. Unlike companies on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets also refers to OTC trading.

What Does Penny Stock Mean?
A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. They will often trade over the counter through the OTCBB

The term itself is a misnomer because there is no generally accepted definition of a penny stock.

Some consider it to be any stock that trades for pennies or those that trade for under $5, while others consider any stock trading off of the major market exchanges as a penny stock. However, confusion can occur as there are some very large companies, based on market capitalization, that trade below $5 per share, while there are many very small companies that trade for $5 or more.

The typical penny stock is a very small company with highly illiquid and speculative shares. The company will also generally be subject to limited listing requirements along with fewer filing and regulatory standards.

What is Over-The-Counter – OTC?
In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as “unlisted stock”, these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone. Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified as OTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records.

Instruments such as bonds do not trade on a formal exchange and are, therefore, also considered OTC securities. Most debt instruments are traded by investment banks making markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the bank that makes the market in that bond and asks for quotes.

What Does Short Selling Mean?
The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

What Does Short Squeeze Mean?
A situation in which a lack of supply and an excess demand for a traded stock forces the price upward. Short squeezes occur more often in smaller cap stocks with small floats.

If a stock starts to rise rapidly, the trend may continue to escalate because the short sellers will likely want out. For example, say a stock rises 15% in one day, those with short positions may be forced to liquidate and cover their position by purchasing the stock. If enough short sellers buy back the stock, the price is pushed even higher.

What Does Short Covering Mean?
Purchasing securities in order to close an open short position. This is done by buying the same type and number of securities that were sold short. Most often, traders cover their shorts whenever they speculate that the securities will rise. In order to make a profit, a short seller must cover the shorts by purchasing the security below the original selling price.

For example, suppose a trader has sold short 50 shares of ABC stock at a price of $10 per share because he speculated that ABC will not be successful in the near future. Unfortunately for the trader, the company has been very lucky recently and its price rises to $15 per share. In order to limit his losses, this trader decides to cover his short position by buying back the 50 short sold shares at a price of $15 per share.

What Does Long (or Long Position) Mean?
The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value. Long doesn’t mean long term trading!

What Does Breakout Mean?
A price movement through an identified level of support or resistance, which is usually followed by heavy volume and increased volatility. Traders will buy the underlying asset when the price breaks above a level of resistance and sell when it breaks below support.

In practice, a breakout is most commonly used to refer to a situation where the price breaks above a level of resistance and heads higher, rather than breaking below a level of support and heading lower. Once a resistance level is broken, it is regarded as the next level of support when the asset experiences a pullback Most traders use chart patterns and other technical tools such as trendlines to identify possible candidates that are likely to break through a support/resistance level.

What Does Breakdown Mean?
A price movement through an identified level of support, which is usually followed by heavy volume and sharp declines. Technical traders will short sell the underlying asset when the price of the security breaks below a support level because it is a clear indication that the bears are in control and that additional selling pressure is likely to follow.

Technical tools such as moving averages, trendlines and chart patterns are the most common methods for technical traders to identify strong areas of support. The chart above shows that a trader will enter into a short position when the price breaks below an area of support (the thick dark line), which has been identified by using a head and shoulders chart pattern.

What Does Intraday Mean?
Another way of saying “within the day”. Intraday price movements are particularly important to short- term traders looking to make many trades over the course of a single trading session. The term intraday is occasionally used to describe securities that trade on the markets during regular business hours, such as stocks and ETFs, as opposed to mutual funds, which must be bought from a dealer.

This term is often used to refer to the new highs and lows of a security. For example, “a new intraday high” means a security reached a new high relative to all other prices during a trading session. In some cases, an intraday high can be equal to the closing price. Traders pay close attention to intraday price movement by using real-time charts in an attempt to benefit from the short-term price fluctuations.

What Does Day Trader Mean?
A stock trader who holds positions for a very short time (from minutes to hours) and makes numerous trades each day. Most trades are entered and closed out within the same day.

What Does Scalpers Mean?
A person trading who holds a position for a very short period of time, attempting to make money off of the bid-ask spread.

What Does Bid-Ask Spread Mean?
The amount by which the ask price exceeds the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it.

What Does Ask Mean?
The price a seller is willing to accept for a security, also known as the offer price. Along with the price, the ask quote will generally also stipulate the amount of the security willing to be sold at that price.

What Does Bid Mean?
An offer made by an investor, a trader or a dealer to buy a security. The bid will stipulate both the price at which the buyer is willing to purchase the security and the quantity to be purchased.

What Does Fundamentals Mean?
The qualitative and quantitative information that contributes to the economic well-being and the subsequent financial valuation of a company, security or currency. Analysts and investors analyze these fundamentals to develop an estimate as to whether the underlying asset is considered a worthwhile investment.

For businesses, information such as revenue, earnings, assets, liabilities and growth are considered some of the fundamentals.

By looking at the economics of a business, the balance sheet, the income statement, management and cash flow, investors are looking at a company’s fundamentals, which help determine a company’s health as well as its growth prospects. A company with little debt and a lot of cash is considered to have strong fundamentals.

While fundamentals are most often considered factors that relate to businesses, securities and currencies also have fundamentals. For example, interest rates, GDP growth, trade balance surplus/deficits and inflation levels are some macroeconomic factors that are considered to be fundamentals of a currency’s value

What Does Technical Analysis Mean?
A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Technical analysts believe that the historical performance of stocks and markets are indications of future

In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst’s decision would be based on the patterns or activity of people going into each store.

Trade like a coward
Let me explain… there is no exact right way to a trading style. Some people like to trade aggressively while others trade more moderately. A general rule, don’t trade more than you feel comfortable with. Some only trade 5% of their portfolio at any given time while others trade up to 50% or more of their portfolio. Find what you are comfortable with and stick with it. Remember, it doesn’t hurt to trade like a coward… you can always get more aggressive later on. I have made a ton of money trading like a coward and I don’t believe in risking more than 30% of my assets on any one play, no matter how sure I am. And I usually cut losses at 5-10% just to play it safe…remember you can be right 99 out of 100 times, but if you go all in or worse use leverage on the one time you’re wrong, you can be wiped out entirely or even owe your broker money…I refuse to ever risk being put in that position…trade safely, trade cowardly.


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