Clearing Up Myths About Penny Stocks

People usually fear what they do not know. You cannot judge or label something until you get to know it.

First impressions are a perfect example. One person may have preconceived notions about somebody who they don’t know much about. Once they get to know that person, they realize that their first impressions were invariably false.

The same thing applies with penny stocks. Penny stocks get a bad first impression. They are quickly written off. The purpose of this article is to get past that first impression, to really dig deep and see if these bad impressions are warranted or not.

Below are some of the myths that always seem to shadow penny stocks.

Myth #1
“You’ll lose all your money if you trade penny stocks.”

This stems from the belief that trading penny stocks is risky. Actually, any form of investing in stocks will always invariably involve risk. The only way you will lose all your money trading penny stocks is if you don’t bother trying to minimize the risk. The key is to look to minimize that risk! It’s as simple as that.

For example, starting your own business incurs high risk. Does that stop people from doing it? No. And you know what? The people who succeed in starting their own business are the ones who minimize the risk. They do that by researching on how to successfully start their own business by reading, talking with people and taking action. The same thing applies to penny stocks.

You will not lose all your money by trading penny stocks provided that you minimize your risk by researching, learning, and practicing trading before starting.

Myth #2
“There’s not enough liquidity in penny stocks.”

What do people mean by liquidity? Liquidity simply means having enough volume to easily buy and sell your shares. For example, if a penny stock only has two trades, its liquidity is said to be low. There are not enough traders to buy and sell.

However, if a stock is experiencing huge amounts of trades, thereby indicating the presence of a large number of traders, its liquidity is said to be high because you can easily buy and sell shares.

Looking at an after market report recap of penny stocks will reflect that there is more than enough liquidity in penny stocks.

This is the measure of the stage the coal has reached between the mineral’s inception as peat. Peat matures to become lignite.

Myth #3
“It’s easy to make money in penny stocks.”

When it comes to penny stocks, the math looks very appealing. Buy shares at a penny and sell them for two cents. There, you just doubled your money. If it were that easy, people would be millionaires.

The fact of the matter is that trading penny stocks can be very rewarding. However, that reward goes to those who educate themselves and paper trade (practice trading with fake money to gain experience), in other words, goes to those who are willing to pay the price to learn.

That’s precisely the reason why some people are very negative toward penny stocks. They have been attracted to the potential of making money, only to rush in without any sort of training or education and become disillusioned and embittered.

Despite all the stereotypes that seem to follow penny stocks, there’s one aspect that everyone agrees on. Penny stocks involve high risk and high reward. There’s no doubt about that. The key to getting that high reward is to learn how to minimize the high risk. It’s as simple as that. It’s as simple as that.

Jason Brook is the author of The Ultimate Step-by-Step Guide to Day Trading Penny Stocks. His website can be found at http://www.daytradepennystocks.com.

Canadian Coalbed Methane Stocks: 7 Things to Know Before Investing

More investors are now inquiring about Coalbed Methane exploration companies. Just as uranium miners were flying well below the radar screen in early 2004, coalbed methane exploration may very well be the next very hot sector later this year and next. Historically, coalbed methane gas endangered coal miners, resulting in alarming fatalities early in the previous century. This is the fate suffered today by many Chinese coal miners in the smaller, private coal mines. Typically, the methane gas trapped in coal seams was flared out, before underground mining began, in order to prevent those explosions. Rising natural gas prices have long since ended that practice.

Today, coalbed methane companies are turning a centuries-long nuisance and byproduct into a valuable resource. About 9 percent of total US natural gas production comes from the natural gas found in coal seams. Because natural gas prices have soared, along with the bull markets found in uranium, oil, and precious and base metals, coalbed methane has come into play. It is after all a natural gas. But because it is outside the realm of the petroleum industry, coalbed methane, or CBM as many industry insiders call it, is called the unconventional gas. It may be unconventional today, but as the industry continue to grow by leaps and bounds, on a global scale, CBM may soon achieve some respect. Please remember that a few years ago, there was very little cheerleading about nuclear energy. Today, positive news items are running far better than ten to one in favor of that power source.

CBM is the natural gas contained in coal. It consists primarily of methane, the gas we use for home heating, gas-fired electrical generation, and industrial fuel. The energy source within natural gas is methane (chemically, it is CH4), whether it comes from the oil industry or from coal beds.

CBM has several strong points in its favor. The gases produced from CBM fields are often nearly 90 percent methane. Which type of gas has more impurities? No, it isn’t the natural, or conventional, gas you thought it might be. Frequently, CBM gas has fewer impurities than the “natural gas” produced from conventional wells. CBM exploration is done at a more shallow level, between 250 and 1000 meters, than conventional gas wells, which sometimes are drilled below 5,000 meters. CBM wells can last a long time – some could produce for 40 years or longer.

Natural gas is created by the compression of underground organic matter combined with the earth’s high temperatures thousands of meters below surface. Conventional gas fills the spaces between the porous reservoir rocks. The coalification process is similar but the result is different: both the coalbed and the methane gas are trapped in the coal seams. Instead of filling the tiny spaces between the rocks, the coal gas is within the coal seams.

One of the past problems associated with CBM exploration was the reliance upon expensive horizontal drilling techniques to extract the methane gas from the coal seams. Advanced fracturing techniques and breakthrough horizontal drilling techniques have increased CBM success ratios. As a result, a growing number of exploration companies are pursuing the early bull market in CBM. Market capitalizations for many of these companies mirror similar “early plays” we mentioned during our mid 2004 uranium coverage (June through October, 2004). Industry experts told us there would be a uranium bull market. Now, we are hearing the same forecasts about CBM.

SEVEN TIPS BY DR. DAVID MARCHIONI

We asked Dr. David Marchioni to provide our subscribers with his 7 Tips to help investors better understand what to look for, before investing in a CBM play. Dr. Marchioni helped co-author the CBM textbook, An Assessment of Coalbed Methane Exploration Projects in Canada, published by the Geological Survey of Canada. He is also president of Petro-Logic Services in Calgary, whose clients have included the Canadian divisions of Apache, BP, BHP, Burlington, Devon, El Paso Energy, and Phillips Petroleum, among others. He is also a director of Pacific Asia China Energy and is overseeing the company’s CBM exploration program in China.

Our series of telephone and email interviews began while Dr. Marchioni sat on a drill rig in Alberta’s foothills, the Manville region, until he finished outlining his top 7 tips, or advices, on how to think like a CBM professional.

1) COAL SEAM THICKNESS

Is there a reasonable thickness of coal? You should find out how thick the coal seams are. With thickness, you get the regional extent of the resource. For example, there must be a minimum thickness into which one can drill a horizontal well.

2) GAS CONTENT

Typically, gas content is expressed as cubic feet of gas per ton of coal. Find how thick it is and how far it is spread. Then, you have a measure of unit gas content. Between coal seam thickness and gas content, you can determine the size of the resource. You have to look at both thickness and gas content. It’s of no use to have high gas content if you don’t have very much coal. The industry looks at resource per unit area. In other words, how much gas is in place per acre, hectare, or square mile? In the early stage of the CBM exploration, this really all you have to work with in evaluating its potential.

3) MATURITY LEVEL OF THE COAL

There is a progressive maturation of coal as a geological time continuum and the earth’s temperature, depending upon depth. By measuring certain parameters, you can determine where it is in the chemical process. For instance, the chemistry of lignite is different from that of anthracite. This phrasing is called “coal rank” in coal industry terminology.

4) PERMEABILITY

When you are beginning to think about CBM production, this and the next item must be evaluated. How permeable is the CBM property? You want permeability, otherwise the gas can’t flow. If the coal isn’t permeable at all, you can never generate gas. The gas has to be able to flow. If it is extremely permeable, then you can perhaps never pump enough water. The water just keeps getting replaced from the large area surrounding the well bore. The water will just keep coming, and you will never lower the pressure so the gas can be released.

5) WATER

In a very high proportion of CBM plays, the coal contains quite a lot of water. You have to pump the water off in order to reduce the pressure in the coal bed. Gas is held in coal by pressure. The deeper you go, typically the more gas you get, because the pressure is higher. The way to induce the gas to start flowing is to pump the water out of the coal and lower the “water head” of pressure. How much water are we going to produce? Are we going to have to dispose of it? If it’s fresh, then there may be problems with regulatory agencies. In Alberta, the government has restrictions on extracting fresh water because others might want to use it. One could be tapping into a zone that people use as water wells for farms and rural communities. Both water quality and water volume matter. For example, Manville water is very salient so nobody wants to put it into a river; this water is pushed back down into existing oil and gas wells in permeable zones (but which are also not connected to the coal).

6) FUNDING

To be able to access land and do some initial drilling, i.e. the first round of financing, it would cost a minimum of C$4 million. This would include some geological work and drilling at least five or six wells. In Horseshoe, that would cost around C$4 million (say 1st round of finance); in Manville, about C$9 million. This is under the assumption that the company doesn’t buy the land. The land in western Canada is very expensive and tightly held. Much of the work is done as a “farm in” drilling on land held by another for a percentage of the play. (Editor’s note: During a previous interview, Dr. Marchioni commented about his preference for Pacific Asia China Energy’s land position in China because comparable land in western Canada would have cost “$100 million or more.”

7) INFRASTRUCTURE

The geology only tells you what’s there, and what the chances of success are. You then have to pursue it. Can we sell it? Gas prices are “local,” meaning they vary from country to country, depending whether it is locally produced and in what abundance (or lack thereof). How much can we extract? How much is it going to cost us to get it out of the ground? Are there readily available services for this property? Will you have to helicopter a rig onto the property at some incredible price just to drill it? Will you have to build a pipeline to transport the gas? Or, in China as an example, are there established convoys for trucking LNG across hundreds of kilometers?

One addition, which we have mentioned in previous articles, and especially in the Market Outlook Journal, “Quality of Management Attracts PR,” it is important that the CBM company have experienced management. This would mean a management team that includes those who have gotten results, not only a veteran exploration geologist but a team that can sell the story and bring in the mandatory financing to move the project into production.

There are two primary reasons why many of these coalbed methane plays are being taken seriously. First, the macroeconomic reason is that rising energy costs have driven companies in the energy fields to pursue any economic projects to help fill the energy gap. Coalbed methane has a more than two decades of proof in the United States. The excitement has spread to Canada, China and India, where CBM exploration is beginning to take off. Second, the fundamental reason is that exploration work has already been done in delineating coal deposits. There are, perhaps, 800 coal basins globally, with less than 50 CBM producing basins. In other words, there is the potential for growth in this sector.

James Finch contributes to StockInterview.com and to other publications. His archived work can be found at http://www.stockinterview.com Feedback is encouraged and James Finch can be contacted by email at jfinch@stockinterview.com

Use A Margin Account Only For Shorting Stocks

Margin–borrowing from your broker--increases your buying power, and when all is right with the world it literally doubles profit potential. But if you make a lousy play you have to pay back double. That’s why we have preached for years against using margin. There’s already enough risk in the market.

Let’s suppose you like stock XYZ at 50 but don’t have the cash in your account to buy all that you want. So you decide to “margin” it, which simply means you borrow 50% of the money to buy XYZ from your brokerage. If the trade goes well and XYZ moves higher, you can sell with a very nice profit.

But what if the market is in the process of correcting? Old XYZ could take a 10-15-point loss, and there is a good chance that eventually the brokerage will call you for the balance. Well, if you had to borrow the money to buy XYZ in the first place, where are you going to get the money to pay back the broker? We know that sometimes margin calls go out, and the customer simply doesn’t have the money to pay. That is an ugly situation that can result in liquidating positions, closing accounts and facing lawsuits.

It’s a different situation with short sales. Brokers insist that you have a margin position to do this sort of trading. That’s because short selling involves borrowing shares from your broker before selling them on the open market. When you are ready to close your short position, you “buy back” shares on the open market and return them to the brokerage.

We like to err on the side of safety. Buying on margin might be OK if you are a day trader who has the right tools and is operating in real time and keeping an eye on things. But if you are a short term investor or even a long-termer you have to be extremely careful if you are going to employ margin. You cannot buy something on margin and sit back and forget about it. A bad market stretch can get you into a boatload of trouble.

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This may also be very helpful to some of you:

http://www.americancashflow.com/agile/index.html

To Make Big Money You Must Focus in on Stocks

Money creation in the stock market is made from CONCENTRATION. That's right. Trading the very best stocks at the right time with enough capital to make a big difference.

You must go from wealth CREATION to wealth maintenance in this game. Unless you plan on "investing" for the next 25+ years and building wealth slowly.. this is my plan of how you can make millions in the stock market:

In Darvas's book "How I Made $2 Million..."

How many looked at his position sizing? In his early trades Darvas only trade 1 or 2 stocks at any one time on MARGIN! Only when he got up to over $500,000 did he start diversifying a little. Most people overlook these facts.

MY Momentum Stock PLAN:

CONCENTRATION BUILDS WEALTH
DIVERSIFICATION MAINTAINS WEALTH

END GOAL:

$2 MILLION+ ACCOUNT MAKING 20-30% P.A

Start with:
$50,000
Trade 2 stocks with half capital in each.

RISK Per TRADE = 5%

When at $100,000 Trade 3 stocks with 1/3
capital in each.

Risk Per Trade = 3%

When at:

$500,000 Trade 5 stocks with 1/5 capital:

Risk Per Trade = 2%

When at $2 Million Trade 8 stocks with 1/8 capital:

Risk Per Trade = 1.25%

You first have to create wealth in order to maintain it. Whilst trading only two stocks at a time may be deemed to “risky” by the “professionals” you must be very selective on the stocks you trade. Quality beats quantity. Especially when you concentrate so much.

This is the only way a small account can break into the big time. You must not only focus your efforts in the early stages but you must also only trade the top 0.1% of stocks in the market and get your timing SPOT ON.

Get your Momentum Stock Trading System and sign up for my free weekly online trading system newsletter here at: http://www.stressfreetrading.com

Stocks That Are Very Good Profit Makers

Stocks that are breaking out are usually very good profit-makers. That’s why you’ll often see us report that “XYZ could break out.”

A breakout occurs when a stock penetrates a previously formed resistance level and shoots ahead with no overhead resistance in the way. These moves can go for many points in a few days.

But you must understand resistance levels.

Suppose that you are watching XYZ every day and notice that it is moving ahead a little by the end of every session. By the end of the week it is up four points and you decide to buy if it is up at the beginning of the next day’s session.

Sure enough, XYZ is up the next morning and you buy at 50. Murphy’s Law then takes effect, and the stock falls five points the next day. Naturally, you aren’t happy and, more important, so are the 10,000 other people who bought the stock on the same day you did. Most of you are thinking the same thing: “If this thing gets anywhere near the price I paid for it, I’m out!”

So after a few days of consolidation XYZ starts to head back up. What do you suppose most of the owners of XYZ who bought it at 50 are going to do the second it gets to 49-1/2? Sell! And XYZ falls like a rock back to 45. The 50 price has become resistance.

Two things have happened. Another wave of people bought XYZ at 49.50, and they can't wait for it to get up there again so they can get their money back. Also, traders noticed what took place. This is a dream come true for them because they highlight stocks that have formed a buy-sell "range" and start to trade it. They buy XYZ at, say, 45.00 and let it run to 49 and then short it so they can make money on the way back down to 45. This pattern--running up, whacking head at 50, falling back, regrouping, running up, whacking head--can be repeated many times.

But what happens when the XYZ finally releases some great earnings news, or its sector heats up so much that the stock finally punches through that 50 resistance line? Well, for one thing, a "short squeeze" is created. That just means all the traders that shorted XYZ figuring it was going to fall back to 45 now have to actually buy those shares as soon as possible to cover their short.

All that rapid buying along with the "new" money that is coming into XYZ because of the news release creates a fantastic supply-demand situation. All buyers and no sellers means that the stock price must go up to get people to sell it to the people that want it. When it finally does break out, it can go for a bunch real quick.

If you find a chart of a company that has rolled up to a resistance level and then fallen back three or more times, watch it closely every time it gets near that high again. If it finally breaks through its resistance and holds, chances are good that it will really fly from there. The key word is “holds.” You have to be patient and make sure it doesn't pull back again. In general, if it holds above that resistance level for a full day, it is moving higher.

The Stocks2Watch® newsletter has been published since 1998.

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