Making BIG Money in Small Stocks
[Table of Contents]
Table of Contents _____________________________________ viii
Investing – The National Pastime __________________________ 1
BEFORE YOU INVEST ____________________________________ 2
THE BIRTH OF THE CHEAP PHILOSOPHY __________________ 2
CORNERSTONES OF THE CHEAP PHILOSOPHY _____________ 4
WELCOME TO THE WORLD OF CHEAP INVESTMENTS ______ 8
THERE IS A BIG DIFFERENCE BETWEEN A STOCK AND THE
MARKET ________________________________________________ 9
Common Stocks are Your BEST Investment ________________ 11
WHAT IS A COMMON STOCK? ___________________________ 12
TYPES OF COMMON STOCKS ____________________________ 13
Blue Chip Stocks ____________________________________________ 13
Growth Stocks ______________________________________________ 13
Income Stocks ______________________________________________ 14
Fad Stocks _________________________________________________ 14
Cyclical Stocks ______________________________________________ 15
Large-Cap, Mid-Cap, Small-Cap and Micro-Cap Stocks ______________ 16
COMMON STOCKS OFFER EXCELLENT LIQUIDITY ________ 18
COMMON STOCKS POSSESS GREAT PROFIT POTENTIAL ___ 19
RISK VERSUS PROFIT POTENTIAL ________________________ 20
COMMON STOCKS AND YOUR TAXES ____________________ 21
Capital Gains _______________________________________________ 21
USING YOUR STOCK AS COLLATERAL ___________________ 22
Stock Exchanges – The Foundation of the Market __________ 24
UNDERSTANDING AN EXCHANGE STOCK TRANSACTION __ 24
NEW YORK STOCK EXCHANGE (NYSE) ___________________ 25
Listing Requirements for the NYSE _____________________________ 26
AMERICAN STOCK EXCHANGE (Amex) ___________________ 27
Listing Requirements for the Amex ______________________________ 28
REGIONAL STOCK EXCHANGES _________________________ 29
The Chicago Stock Exchange (CHX; formerly Midwest Stock Exchange) 29
Table of Contents ix
The Pacific Stock Exchange (PCX) ______________________________ 29
The Philadelphia Stock Exchange (PHLX) ________________________ 30
The Boston Stock Exchange ___________________________________ 30
The Cincinnati Stock Exchange _________________________________ 30
THE NASDAQ MARKET __________________________________ 31
The NASDAQ National Market System __________________________ 31
The NASDAQ SmallCaps Market _______________________________ 32
Understanding a NASDAQ Stock Transaction _____________________ 33
OTC BULLETIN BOARD _________________________________ 33
OTC PINK SHEETS ______________________________________ 34
STOCK INDEXES AND THEIR MARKET EFFECT ____________ 35
Understanding the Investment Process ____________________ 38
WHY A COMPANY DECIDES TO SELL STOCK ______________ 38
SPECIALIZING IN ONE AREA RATHER THAN IN MANY _____ 40
THE GREED/FEAR TRAP _________________________________ 41
PROTECTING YOURSELF FROM THE GREED/FEAR TRAP ___ 43
Analyzing Stocks Easily and Profitably ____________________ 45
FUNDAMENTAL AND TECHNICAL ANALYSIS _____________ 45
Fundamental Analysis ________________________________________ 46
Technical Analysis ___________________________________________ 46
Comparing Fundamental and Technical Analysis ___________________ 50
DELVING INTO ANNUAL, 10-K, 10-Q AND QUARTERLY
REPORTS AND PRESS RELEASES _________________________ 51
Annual Reports______________________________________________ 52
Financial Statement __________________________________________ 52
What to Look For in the Annual Report ___________________________ 53
Form 10-K _________________________________________________ 55
Form 10-Q _________________________________________________ 57
Quarterly Report_____________________________________________ 57
Press Releases ______________________________________________ 57
GETTING THE FACTS BEFORE YOU INVEST _______________ 57
FINDING THE NEXT SUPERSTOCK________________________ 58
Mastering CHEAP Stocks _______________________________ 60
TREMENDOUS POTENTIAL VERSUS BLUE CHIPS __________ 61
DIVERSIFICATION IN GRADES OF SPECULATION __________ 63
LOCATING A CHEAP INVESTMENT _______________________ 64
x Table of Contents
Listing Stocks for Further Research ______________________________ 65
NASDAQ Stocks ____________________________________________ 66
OTC Bulletin Board Stocks ____________________________________ 66
OTC Pink-Sheet Stocks _______________________________________ 67
Penny Stocks _______________________________________________ 68
THE PITFALLS OF HOT TIPS _____________________________ 68
THREE CRITERIA FOR SUCCESSFUL STOCK PICKS _________ 69
LITTLE COMPETITION MEANS VERY HIGH PROFITS _______ 70
HOW TO FOLLOW YOUR STOCKS ________________________ 71
Mastering Turnaround Stocks ___________________________ 72
WHAT IS A TURNAROUND STOCK? _______________________ 73
Aspect Telecommunications - A Turnaround Stock _________________ 74
THE HUGE PROFIT POTENTIAL OF TURNAROUNDS ________ 74
Investing in a Quality Stock in a Depressed Industry ________________ 75
The Contrarian Approach ______________________________________ 76
IDENTIFYING AND SELECTING A QUALITY TURNAROUND 77
Locating Turnaround Stocks ___________________________________ 77
What to Look For in a Turnaround Stock _________________________ 77
TURNAROUNDS TO AVOID ______________________________ 78
Companies in Industries that are Extremely Capital Intensive __________ 79
Companies That Have an Extremely Large Debt ____________________ 79
Companies That Offer High Percentage Dividends __________________ 80
Companies Affected by Foreign Currency _________________________ 80
Companies That Are Recommended as Hot Tips ___________________ 81
TAKE YOUR PROFITS ___________________________________ 81
Mastering Stocks in Bankruptcy _________________________ 82
BANKRUPTCY (CHAPTER 11) – AN OVERVIEW ____________ 84
LOCATING COMPANIES IN CHAPTER 11 __________________ 85
Companies with Huge Sales ____________________________________ 85
Companies Listed on the NYSE _________________________________ 86
Companies That Are Former “Darlings” of Wall Street ______________ 86
Companies with Widely Known Names or Products _________________ 86
SELECTING BANKRUPTCIES WITH THE MOST POTENTIAL _ 87
Companies That Change Management ____________________________ 87
Companies That Become Profitable ______________________________ 87
Companies That Enter a Prepackaged Chapter 11 ___________________ 90
Companies with a Confirmed Reorganization Plan __________________ 90
TRENDS IN BANKRUPTCIES _____________________________ 91
Table of Contents xi
Management Sellout to Creditors ________________________________ 93
Common Shareholders are Not Secured Creditors ___________________ 93
Mastering New Issues __________________________________ 96
THE NEW ISSUE PROCESS _______________________________ 96
Entrepreneur’s Dream ________________________________________ 96
The Business Plan ___________________________________________ 97
The Underwriter _____________________________________________ 97
Structuring the Deal __________________________________________ 98
Red Herring ________________________________________________ 99
Prospectus _________________________________________________ 99
Filing in Individual States ____________________________________ 100
TYPES OF NEW ISSUE OFFERINGS _______________________ 100
UNDERWRITER SYNDICATION AND SUPPORT OF THE NEW
ISSUE _________________________________________________ 101
HOW TO EASILY READ A NEW ISSUE PROSPECTUS _______ 103
MAKING AND LOSING MONEY IN NEW ISSUES ___________ 107
NEW ISSUE SCAMS ____________________________________ 109
Choosing the Best Broker for Your Needs _________________ 111
FULL-SERVICE VERSUS DISCOUNT BROKERS ____________ 111
FINDING, KEEPING AND WORKING WITH A BROKER _____ 113
Locating the Right Broker for You _____________________________ 113
Beware of the Unethical Broker ________________________________ 117
OPENING AN ACCOUNT ________________________________ 117
Should you Take Possession of Your Stock Certificates? ____________ 117
How and When to Buy Stocks ___________________________ 120
HOW TO FIND STOCKS _________________________________ 120
HOW TO BUY STOCKS _________________________________ 121
Buying Stock – Size does Matter _______________________________ 121
Type of Buy Order __________________________________________ 122
HOW TO BUY THE RIGHT STOCK AT THE RIGHT PRICE ___ 122
PATIENCE AND DISCIPLINE PAY ________________________ 123
DOLLAR COST AVERAGING ____________________________ 124
HOW TO AVERAGE DOWN _____________________________ 125
TAKING ADVANTAGE OF THE NEXT BULL MARKET ______ 127
How and When to Sell Your Stock _______________________ 129
xii Table of Contents
SELL OR AVERAGE DOWN?_____________________________ 131
TAKING YOUR PROFIT, PROTECTING YOUR PROFIT ______ 131
TIPS FOR WHEN TO PLACE A SELL ORDER _______________ 132
The Company Announces a Reverse Stock Split ___________________ 132
The Company Raises Cash Through an Equity Offering _____________ 135
Large Increases in Inventory __________________________________ 136
The Company Merges with Another Company ____________________ 136
The Stock Price is Nearing a Resistance Level ____________________ 137
MARKET SELL, LIMIT SELL, STOP LOSS AND STOP LIMIT
ORDERS ______________________________________________ 138
Market Sell Order ___________________________________________ 138
Limit Sell Order ____________________________________________ 138
Stop Loss Order ____________________________________________ 138
Stop Limit Order ___________________________________________ 140
TAX SELLING AND THE JANUARY EFFECT _______________ 140
THE PARTIAL PROFIT STRATEGY _______________________ 142
Profiting from Market Volatility ________________________ 143
COMPUTERIZED PROGRAM TRADING ___________________ 144
VOLATILITY – A LEGACY OF THE CRASH OF 1987 ________ 144
VOLATILITY CAUSED BY THE MIDDLE EAST OIL CRISIS __ 146
THE LAST DECADE IN THE MILLENIUM _________________ 146
9/11 ATTACKS CREATE NEW VOLATILITY _______________ 148
PROFITING FROM COMMODITY PRICE VOLATILTY _______ 149
VOLATILITY FROM THE WAR WITH IRAQ _______________ 151
VOLATILITY IS HERE TO STAY _________________________ 152
Investigate Before You Invest ___________________________ 153
INVESTIGATE BEFORE INVESTING ______________________ 154
Classic Commodity Half-and-Half Scam _________________________ 154
U.S. Brokers and Brokerage Firms _____________________________ 155
Commodity Brokers, Futures Brokers and Brokerage Firms __________ 155
SPOTTING AN INVESTMENT SCAM ______________________ 155
Penny-Stock Scams _________________________________________ 156
Pump and Dump Schemes ____________________________________ 156
Internet Investment Scams ____________________________________ 157
Chat Line Schemes __________________________________________ 158
SCAMPROOFING YOUR INVESTMENTS __________________ 158
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Weeding Out the Scams ______________________________________ 160
REGULATION IN THE MARKET-THE SEC _________________ 160
Securities Regulators: ________________________________________ 161
Investing Without Using Money _________________________ 163
SIMULATING A STOCK TRADE __________________________ 163
Stock Record Worksheet _____________________________________ 165
Stock Price Data Sheet _______________________________________ 167
ANALYZING THE TRANSACTION _______________________ 167
Lessons Learned _____________________________________ 172
Glossary _