The definition of a qualified plan is one that meets the IRS regulations outlined in section 401 of the tax code. Qualified plans allow employers to create savings vehicles for their employees which carry special tax rules; one of which allows the employer contribution into the employee account as a tax deductible event. Employees, on the other hand, will use these plans to accumulate wealth and savings at a tax free rate until retirement. A great aspect of a qualified plan, for the employee, is that taxes are deferred on contributions and investment gains until the money is withdrawn.

All employees (as defined by the company) are allowed to participate in taking advantage of participation in qualified plans and are not restricted from taking their contributions and investment profits with them when they leave the company. Usually, most people will transfer the funds to their new companies retirement savings plan or transfer it into another banking institution, such as Fidelity. However, some employers will not allow you to transfer out their match amounts if those contributions have not vested for a minimum amount of time.

The government has set up these plans chiefly for retirement purposes by enacting several distribution rules which prevent early withdrawals; one of those rules is the minimum age requirement attached to many of these plans and also a penalty tax must be paid for early withdrawal.

The most common type of qualified plan is a 401k, but there are a few others; money purchase pension plans, keoghs, target benefit plans, defined benefit plans, employee stock ownership plans, stock bonus plans, and roth 401k plans.

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The Public Short Ratio (PSR) is a market sentiment indicator that shows the relationship between the number of public short sales and the total number of short sales. The assumption is that the public are poor traders; hence going counter to their positions can create profitable opportunities. The PSR is calculated by dividing the volume of weekly short sales made by institutions and stock exchange members and those made by the public or retail.

Understanding the PSR

The Public Short Ratio is displayed as a line. As the value of the PSR increases, it is displaying the public's bearish sentiment towards the stock market. In order to make observations about the indicator, traders use a 10-week moving average of the closing price of the PSR. When the 10-week moving average of the PSR is above 25%, the public is bearish. Conversely, a PSR moving average value under 25%, the public is bullish.

Like many indicators, if the PSR moving average value stays above or below the 25% ratio for an extended period, the primary trend has legs. When a market begins to rally after an extended bear market, the PSR will stay above 25%, as the public shorts the strength. This is why the market will grind higher as it transitions from a bear to a bull market. Professional traders believe that the true sign of a strong bull market is an extremely high Public Short Ratio reading. While the PSR is a simple indicator to observe, many novice traders do not have access to the trading platforms that publish the indicator.

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The Shanghai Stock Exchange (SSE) is the largest stock exchange in China. The exchange is a non-profit organization with a market capitalization of nearly $2.38 trillion making it the fifth largest exchange in the world.


The Shanghai Stock Exchange began trading in 1866. In 1891 foreign businessman founded the "Shanghai Share brokers' Association, which was China's first stock exchange. The exchange went through a number of changes as China removed the Qing Dynasty in 1911 and the two World Wars. Through all this the exchange was able to thrive and the current Shanghai Stock Exchange we know today, began its trading operations in 1990.


Currently there two main classes traded on the exchange. Class A shares are quoted in yaun and are only available to foreign investors through a qualified program known as QFII. Class B shares are quoted in US Dollars and are generally open to foreign investments. The exchange is open Monday through Friday and is divided into two sessions (not including pre-market). The first session is session is between 9:30 and 11:30. The second session is in the afternoon an goes from 13:00 to 15:00.

SSE largest stocks1. PetroChina (3,656.20 billion)

2. Industrial and Commercial Bank of China (1,417.93 billion)

3. Sinopec (961.42 billion)

4. Bank of China (894.42 billion)

5. China Shenhua Energy Company (824.22 billion)

6. China Life (667.39 billion)

7. China Merchants Bank (352.74 billion)

8. Ping An Insurance (272.53 billion)

9. Bank of Communications (269.41 billion)

10. China Pacific Insurance (256.64 billion)

The Shangai Stock Exchange has experienced a massive bull market in recent years as the US Markets have been trending sideways. Time will tell if this trend will hold, or if the dollar will be able to rebound.

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Bollinger Bands were developed by John Bollinger as a technical trading tool in the early 1980s. They arose from the need for adaptive trading bands and the observation that volatility was not static as was widely believed, but dynamic. Bollinger developed the technique of using moving averages with two trading bands. This is not unlike using an envelope on either side of a moving average. However, unlike using a percentage computation from a normal moving average, Bollinger Bands add and subtract a standard deviation calculation.

To put this in perspective, let's define the term "standard deviation." This term refers to a mathematical formula that measures volatility, thus showing how the stock price can be spread around its true value. The technician is relatively certain that most of the price data needed will be found between the two brands. The bands can't be used to make reliable statements regarding what percentage of equity's prices will lie within a certain distance of a mean value, because an individual equity price does not obey known distribution functions (the stochastic process). Standard deviations of stock prices for finite time periods are not fixed parameters as required to apply classical statistical theory. Instead, they are variables in constant flux dependent upon price volatility. When the bands lie close together, low volatility is indicated. Likewise, when the bands lie farther apart, high volatility is achieved. However, when the bands have only a slight slope and lie approximately parallel for a long period of time the stock's price will oscillate up and down between the bands as though in a channel.

Bollinger Bands are used to provide a definition of relative high and low. This is an indication of prices being "high" at one end and "low" at the other end. Using this definition can aid in recognizing rigorous patterns and is useful in the comparison of price action to indicator action when arriving at systematic trading decisions.

Bollinger Bands consist of a centerline and two price channels. One price channel is above the centerline, and the other is below the centerline. This centerline is an exponential moving average. The price channels are standard deviations of the stock being studied by the chartist. Therefore, the definition of a "price channel" in this regard refers to the encompassment of the trading activity around the trend of trading after a sharp rise or fall in the market. The bands will expand and contract as the price action of an issue becomes volatile (this is expansion) or becomes bound into a tight trading pattern (the definition of contraction).

The middle Bollinger Band equals a 20-period moving average. The upper Bollinger Bands consists of the middle Bollinger Band plus the total of two 20-period standard deviations. The lower Bollinger Band is equivalent to the middle Bollinger Band minus the total of two 20-period standard deviations.

Two important tools are derivative of the Bollinger Bands. BandWidth, which is a relative measure of the width of the bands, is the first tool. BandWidth is calculated by dividing the result of the upper Bollinger Brand minus the lower Bollinger Band by the middle Bollinger Band. This is most often used to quantify "The Squeeze, " volatility based trading opportunity. The second tool derived from Bollinger Bands is %b. this is a measure of where the last price is in relation to the bands. This is calculated by dividing the result of the last minus the lower Bollinger Band by the upper Bollinger Band minus the lower Bollinger Band. %b is most often used to clarify trading patterns. It is also used as an input for trading systems.

Markets trade erratically on a daily basis even though they are still trading either when they are up in the trend or down in the trend. Moving averages are used with support and resistance lines to anticipate the stock's price action. These upper resistance and lower support lines are first drawn and then extrapolated to form channels. The trader expects prices to be contained within these formulated channels. Sometimes, straight lines are drawn connecting either tops or bottoms of prices in order to identify the upper or lower price extremes (respectively). Parallel lines are then added to define the channel within which the prices should move. As long as prices stay in this channel, traders can be reasonably confident that prices are moving as expected.

When the stock price touches the upper Bollinger Band continually, the price is thought to be overbought. Conversely, when stock prices continually touch the lower band of the Bollinger Band, the prices are considered "oversold," and thusly a buy signal would kick in.

Designate the upper and lower bands as price targets when using Bollinger Bands. If the price deflects off of the lower band and crosses above the middle line (the 20-day average), then the upper band comes to represent the upper price target. Prices usually fluctuate between the upper band and the 20-day moving average in a strong uptrend. When this happens, a crossing below the middle line warns of a reversal in trends to the downside (lower band).

Use of the Bollinger Band among traders varies wildly. Some traders buy when the price touches the lower Bollinger Band and sell when price touches the moving average in the center of the bands. Conversely, other traders buy when price breaks above the upper Bollinger Band or sell when price falls beneath the lower Bollinger Band.

Bollinger Bands can also be used in combination with price action and other indicators to generate signals and foreshadow significant moves. A "double bottom buy" signal is given when prices penetrate the lower band and remain above the lower band after a subsequent low forms. It doesn't matter which low is higher or lower than the other one, as long as the second low stays above the lower band. On the other hand, a "double top sell" signal is given when the prices peak above the upper band and the next peak fails to break above the upper band.

Not only stock traders use the Bollinger Band. Options traders (especially implied volatility traders) often sell options when Bollinger Bands are at their most historic difference or buy when Bollinger Bands are at their closest historic point. They do this with the expectation that volatility will revert back toward the average historical volatility level for the stock.

In conclusion, Bollinger Bands are helpful when generating buy and sell signals. They are not, however, designed to determine the future direction of a security. The Bands were designed to add to other analysis techniques and indicators. All in all, Bollinger Bands serve two primary functions: the identification of low and high volatility periods, and the detection of periods when prices are at an extreme and possibly unsustainable level.


If you have looked at the price activity in a stock or market chart you may have seen lines drawn from one price point in time to another and so on from there. Trendlines are aptly named as they help to define the range of price activity that a stock or market is exhibiting during the duration of that trend. If you look closely at such a chart you will begin to see where price intersects at or near this line perhaps more than once over the course of time. A trendline is a kind of connect the dots attempt at uncovering price activity within a trend which will eventually reveal price activity that will breakout of its range. If you are looking at a daily chart you will see this more frequently than when looking at a weekly or monthly chart.

Trendlines are simple expressions of the price points of intersection, much like a mathematical formula. It is said that math can be used to express all things in nature. Music has its melody which is expressed in mathematical equivalents. All things in our physical world can be expressed in dimensional forms. So too can a stock or a given market. Trendlines lines help to ascertain where and when a stock or market will break out into higher territory or break down in price. Trendlines are one simple way to gauge the relationship of price, in time, to price and timing.

Most investors know of the maxim buy when a stock or market is making higher high's and higher lows. This indicates strength within the security or market. The reverse is also true that one should sell lower highs and lower lows. This indicates weakness within the security or market. Trendlines can easily help solve the puzzle of market strength or weakness in relation to other price activity that has taken place before it and where in time and price that the trendline may become important again.

Professional investors use charts and its price activity to help them gauge the activity of other professional investors/speculators and to identify stocks that are being accumulated or sold. Trendlines help us formulate a plan to gauge when that demand on the buy side or lack of demand on the sell side becomes an important part of an entry (buy) or exit (sell) strategy.

There are lateral or horizontal trendline breakouts that occur and there are sloping trendline breakouts either of the ascending or descending type. There are trendline's that we begin from a bottom and there are trendlines that we begin from a top.

A trendline once drawn will continue to the next top or bottom pivot point or high or low in price. For the sake of simplicity, high prices are usually connected to high prices and low prices are usually connected to low prices to form the trendline channel. There it will intersect with the high or low and continue on. These intersections at price form the foundation of a trendline or trend. A trend is the continuation of a price pattern in a given direction. The range of that price pattern will vary significantly from security to security or market to market.

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There are a few ways to predict future stock market trend and directions. Most stock brokers analysts use fundamental and economics to predict where the stock may go.

Question is, how do you know if their recommendations are any good? Remember the dot com , boom and bust? And now the credit crunch ?

The answer is simple, do your own research or learn from experts in that field. There are a few methods which seems to be quite reliable however brief or long term it may be.

1. Fundamental analysis -

This is to evaluate the company past performance, look at ratio like PE ratio , PEG ratio ,earning per share, etc and compare with the market sector to see if the company is undervalued......etc

2. Use of Technical Analysis

Some say fundamental analysis does not come into this equation. Most use charts and chart patterns like cup and handle, head and shoulder, trend lines etc to forecast where the stock is heading. However, if you combine the two together, it will give you a slight edge over other traders.

3. Use of simple proven stock trading strategies, these stock market predictions techniques with experts help or do it yourself by using, Elliot Wave, Delta Trading, Market matrix, Swing Stock Trading - Advanced Swing trading strategy.

These involves simple calculations (percentages), drawing lines on stock market charts, counting number of traded bars etc. Some dispute these findings, but I say don't ignore them. Just use basic common sense , combine them together and you will have an edge over other traders and be more successful in your trading.

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Government administered retirement programs are always inadequate. You pay contributions throughout your life in the hope of getting social security/pension. But two things work against you - an aging population with more payments due and inflation. You could look at various alternatives - keeping your savings in the mattress, certificates of deposits, loaning it on interest to relatives, bonds, properties, stocks etc. The list goes on and on. However, the best is to invest in stocks. Stocks have grown over long term and have returned more than the inflation rate. This is exactly what you want.

You need to own stocks that will keep growing and providing capital appreciation, so your nest egg keeps growing. Let us say you invest $10K today - this will grow to $50 over a period of 10 years, if you have an average return of 17%. You could look through the past and come up with several stocks that have delivered this kind of return. But that is not enough. You should be able to look at it and with reasonable certainty say that it will continue to deliver the same kind of returns in the future.

Let us look at what we want in a company that would deliver these results. Should be a Large cap company, size has advantages, should have grown in all phases of the trade cycle, including slow downs, should have a market base that keeps growing, should have products that are in day to day usage, should have the ability to crush competition, and great cash reserves, and last but not the least a great business model.

There is only one company that today fits the bill. That is Wal Mart. The conglomerate that some hate, some love, but is not going away. This is the largest retailer in the world, sells 40% of Hollywood's DVD output, the largest retailer in the states. Their business model is straight and simple. Offer merchandise at the lowest price. It is very difficult to find areas to grow when you are a $300B company. But they sell day to day products. They sell more tobacco, candy, toothpaste, detergent, and pet food than anyone else in the country. The common man makes his pay go a little further when he shops at Wal Mart. They have grown by 15% over the last 10 years. Their international business also grows by 25% annually.

The share price was at its highest at $70 in 1999 with a P/E of 35. P/E is the multiple that a buyer is willing pay in terms of earnings per share. Say a company earns $2 per year. If a willing buyer pays $70 for the share he is paying 35 times the current annual earnings per share.

Today it is quoted at $57 - a P/E of 18. When I look around for the one share that I can buy without looking at the financial statements every month and the share price everyday it is Wal Mart. They have also made it very easy for you to invest. You could buy shares directly in this company by investing $250 through Computershare.com. You could sign up for monthly investment of $25 for at least 10 consecutive months. They will reinvest your dividends too.

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If there is one thing that every investor has in common, it is the fact that we all want to have a retirement free from financial worry. Our financial lives work through the same cycle of working paycheck to paycheck, finally being able to put some money away and then eventually having enough money to invest with. While we learned a lot during those first days on our own, the financial uncertainty isn't something we ever want to return to, so investing for our retirement is absolutely vital. Here are a few tips we can keep in mind when planning out a path to our financial future.

Before we buy our first stock or invest in our first bond, we need to have an investment strategy in place. An investment strategy takes several key pieces of information into account to help us decide how we need to invest to meet our long term goal of being financially solvent for retirement. You will need to take into consideration exactly how much you have to invest, how much time you have until you want to retire and if you want to use your invested money for anything else (kids college education, buying a second home, etc) other than retirement. Once you have all of this information down, your stock broker can help you pick investments based on the amount of risk you need to take to meet your financial goals on time. If you have a lot of money to invest and you start investing at an early age, you can pull back on the amount of risk you take since you have plenty of time to accumulate the wealth you need to meet your goal. On the other hand, if you wait too long to start investing and you don't have too much money to invest, you will need to ratchet up the risk, and the potential reward, to meet your goals on time. That's why it is always a good idea to start investing, even if it is a small investment, as early in life as you can.

Once your long term investment goals are set and you have a path you can follow, you can then pick out your investments and watch them to see if they pan out. Being patient with your investments is extremely important since not every investment pans out right away. Some investments take weeks or even months to start turning the profit you were expecting and it can be hard to stand by and watch them sputter. A smart investor will keep an eye out for other investments that they can turn to in case their original batch doesn't pan out. It is important, however, to screen all of your investment ideas through your stock broker first so he or she can tell you if you are making a good move.

Finally, try to ensure that you have a diverse portfolio so that if some of your high risk investments turn south, you don't end up losing your shirt. Even if it is determined that you need to be especially aggressive with your investments, it is always a good idea to have a few low risk investments on the side to help balance out your portfolio. You can invest in bonds, blue chip stocks or blue chip-centered mutual funds to get the balance you need.

Investing for retirement is the goal that each and every investor has, and it isn't that hard as long as you follow the investment path you are given.

Free and immediate access to over 30 stock investing videos, created specifically for beginners. Learn how to invest safely, wisely and profitably.

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It would be almost impossible to make a comprehensive list of all of the ways television and movies have mislead us or oversimplified things when it comes to performing complex tasks over the years, but if such a list existed, investing would likely be at or near the top. In Hollywood, every stock transaction is done on a whim thanks to a red hot stock tip gotten from someone on the inside or someone's crazy uncle who can see into the future. In reality, hot stock tips to exist, but even the hottest ones are researched meticulously so that those involved don't lose their shirts. Researching stocks is a bit of an art form, however, the Internet has made doing most of the heavy lifting easy. Here are a few tips for the amateur stock researcher to follow.

If you are a smart investor than you have a full service stock broker on speed dial that you can speak with at any time. Before you make the final decision to buy a stock, it is always a good idea to tap into the huge knowledge base that your broker has at his or her disposal and see if this stock is all its cracked up to be. This is one of the major reasons why having a full service broker is better than using one of the online stock trading websites. With a full service broker, they can give you more information that the vital statistics associated with a particular stock. They will likely know about any sort of breaking news associated with that company and what the daily activity has been on that stock (are people buying or are people selling.) Most importantly, they can also give you information that only they are privy to that might or might not have been made public yet. The best research tool any investor can have is a good stock broker.

If you have made the decision to invest online on your own, there is still quite a bit of information available on the Internet. Many online stock trading websites not only deliver a huge amount of raw data to their users about how a stock has performed over the short and long term, but also how to read that data. They have dozens of graphs, charts and read outs that try to put the raw data into context. What these sites can't do, really, is interpret the data and tell you how all of that is likely going to affect the stock's future performance. Of course, this is speculation and not statistical analysis, but knowing how a stock has performed in the past doesn't really help you if your fortunes are going to be determined by what the stock does in the future. Research can only help give you some context on where the stock has been.

Finally, having a subscription to a daily newspaper like the Wall Street Journal, or at least an online subscription to their webpage, is an essential way you can do research, just bear in mind that there are millions of other people reading the same information and likely acting on the same trends you are. It isn't really possible to get a "hot stock tip" from the financial newspaper of record, but it can help you spot trends and news that can affect how the market is going to perform in the future.

Stock research is a vital part of any healthy investment strategy. However, having a plugged in stock broker on your side is the best research assistant possible.

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When people think of long term they think of investing. Buying shares of companies that will one day be huge. They rarely ever think about trading. Even though trading can offer a better long term solution then investing in many cases.

Let me clarify what trading is. Unlike investing trading is attempting to time the market. Enter, make a profit or loss, and exit. It is really that simple. The idea is that with the right system you can still make a profit on average, month after month.

Many traders will only be in a trade to a few days, maybe a month. So, how can trading help you make long term profit? You have to reinvest your profits. Instead of spending the money you make if you reinvest your profits back into the stock market you can let your money grow at an exponential rate.

This method can be many times over greater than investing. That is because it deals with compound interest over short periods, not years. Let us compare the two.

You have $10,000 and want to let it grow for 10 years. You have two options. You can invest it or trade it.

If you invest it and pull out 20% a year, after 10 years you would have $61,917. You have made a good sum of money. Not enough to live off of, but a decent amount.

If you chose to trade it however and pulled out just 5% a month, after 10 years you would have $3,489,119. That could make you a millionaire many times over. This is all due to compound interest which is what trading is built off of.

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By Steven D Alexander

Small cap stocks need not be hot tip penny stocks or speculative growth stories based on an idea and a prayer. There are plenty of quality, undervalued small cap stocks out there, and this article tells you how to find them.

1) Find the Big Fish in Small Ponds

It is fundamentally difficult for small capitalization stocks to build and maintain a competitive moat. For one, these companies do not have the economies of scale that large, multi-national corporations have developed that gives them the ability to squeeze suppliers on price, spend hundreds of millions on marketing, or afford huge sums for research and development. Many small companies do indeed grab market share by being first to market with new technology or ideas, but this advantage rarely lasts. In the best case, the company is purchased at a premium by a larger competitor. At worst, the company is copied and then priced or marketed out of existence. The outcome for these companies is speculative, and we do not want to be speculators but investors.

So how do we find small caps with a reasonable competitive advantage? One way is to find companies that dominate very small, limited markets. This is known as the "Big Fish in a Small Pond" scenario. Because of the limited market opportunity, larger firms generally don't bother to compete there. This can allow a relatively small company to control the market, consistently able to raise prices and perhaps move into closely related industry. The outcome of this is high returns on capital for long periods of time. Of course, we don't want to buy these until they are cheap!

For an example of this, consider Winnebago (WGO). At under 500 million market cap, this is clearly a small cap stock. Motor home manufacturing is not a lucrative market with wide appeal. Because of this, few new competitors bother to enter it - only about 10 companies control the market. Winnebago is the big fish in this small pond, with over 20% share. Because of this, the company has been able to maintain (and even increase) pricing, continue to build brand equity, and reward shareholders with dividend hikes and buybacks. Winnebago has averaged well over 20% return on equity for over 10 years - a sign of a potential competitive moat.

2) Management Matters

In general, Wall Street overvalues management. Businessweek and Forbes paste the faces of successful CEOs all over the front page in recognition of a few quarters of beating estimates. But there is ample evidence that previously great managers have limited effectiveness when running a poor business. See Alan Mullaly at Ford (F), David Neeleman at Jetblue (JBLU), or Eddie Lampert at Sears (SHLD).

With small caps, the story is different. Here, managers often wear several hats and are responsible for strategy and implementation, making great minds even more important. A great strategy can easily fail if not well implemented. Even more evidently, great implementation of a poor strategy is a sure path to small cap failure.

To value management, look for founder CEOs that own a large stake in the company - preferably 10% or more. This aligns their interests with yours. Founder CEOs of small caps with strong profitability records likely have a good strategy and have been successful putting it to work. Beware of small caps with vagabond management or those that use shareholder capital to give themselves generous salaries or perks.

3) Debt is Dangerous

This one is obvious - excessive debt is especially dangerous when dealing with small caps. Some large companies can afford to carry large debt loads, as they are virtually assured of future cash flows and can easily survive major economic downturns. Hershey (HSY) is a good example of this.

Few small caps have the luxury of knowing that their cash flows can survive virtually any economic situation. Also, banks sometimes consider small companies more risky, and price debt at higher interest rates for them. Therefore, every dollar of debt owed requires a higher return on capital than a similar dollar of debt in a big, stable corporation. Clearly, debt is a bigger burden for small caps.

Ideally, you want to pick small caps with no debt whatsoever. Minimal debt can be helpful, but be wary of stocks with a debt-to-equity ratio over 30%.

4) Diversify

When investing in widely diversified stalwarts like Johnson and Johnson (JNJ) or GE (GE), each of whom has been around over 120 years and controls multiple product segments, there is almost no chance of losing all of your investment. With small caps, on the other hand, even the most carefully chosen pick can easily see it's business opportunities disappear. Most of these companies rely either on a single product or a small selection of products in a very focused market. The lack of product diversification is dangerous because if that one market is affected by any adverse factors (from technology changes, new competition, even changing consumer tastes), the small cap company can be dragged down with it. Thus, lack of product diversification is the single biggest risk in small cap investing.

Take for example a MFI stock, Select Comfort (SCSS), the maker of the Sleep Number bed. Just a year and a half ago this company looked like a great buy, driving returns on equity well over 30% and growing revenues and earnings in the 20% range (and with no debt to boot). But a number of challenges all hit the company at once. The housing market went into a deep decline, competitors like Tempur-Pedic (TPX) gained ground, and soon Select Comfort found it's only product under siege. Sales and earnings tanked, and the stock has dropped from the mid-20's into penny stock range.

For these reasons, you MUST diversify when buying small caps. Even the most attractive opportunities are not immune to stock price swan dives.

5) Never Forget the Fundamentals

The last rule may seem obvious, but it's a rule nonetheless - don't forget the fundamentals! Particularly, look for a reasonable history of above average returns on capital (15-25% return on equity, 25% or higher return on invested captial), and solid free cash flow margins (at least 5%). Any fad stock or technology leader can generate high returns on capital for a year or two, but only a company with a sustainable market and business model can maintain these returns for 5 years, preferably more. As always, don't be lured by earnings growth alone... if the company is making sales it won't be able to collect on, those earnings are no good. Focus on cash flow instead of earnings.

Another great sign in a small cap is the payment of dividends. Dividends are a very underrated part of total stock returns. In his book The Future for Investors, Wharton professor Jeremy Siegel calculates that reinvested dividends would have accounted for the majority of S&P 500 index returns over the past 60 years. Not only this, but the payment of dividends is tangible proof of a company generating excess cash flow. Instead of blowing those extra cash flows on overpriced acquisitions, they are paid out to their rightful owners - the shareholders. Paying out this excess cash also optimizes return on capital.

Don't be Afraid of Small Caps!

Many investors are lured away from small caps by their financial advisors. Some reasons for this are legitimate - small caps require a lot more research time and are subject to more risk. However, the rewards are well worth the effort. The Magic Formula screen is filled with both quality and questionable small cap stocks. Some of these will fade into obscurity, and some will rocket back to their true value - and keep going up.


Picking Great Penny Stock is something of a controversy. Made famous in the film, 'Boiler Room', penny stock are generally defined as stocks valued at less than $5 dollars. Of greater importance than the stock price is what the stock stand for. Penny stock investors generally hope to make their money from either short or long term investing.

The long term investors are looking to spot the next big thing. They are the talent scouts of the investment world on the look out for a rising star. With good fundamentals (good management, good business model, product and a bit of luck) this company will hit it big. Now those shares you bought for a few cents (and at a few cents a share you can buy lots of them) are trading at tens of dollars. If you get really lucky they might go higher.

The short term traders look to profit within hours, maybe a few days if they are patient. They make money speculatively and are looking for indications a share price is rising and will continue to do so. Once the share hits a ceiling price - sold and the investor walks away with many more times his (or her) original stake.

The long term investors are those likely to take their time. They look at the company earnings, check out various ratios and establish cash flow through the company. They might look at management stocks holdings and are generally giving the company a health check.

The short term investors on the other hand are out for a quick buck. A favourable profit forecast, a development in the economy, anything at all that might double or triple the stock price overnight. Then it's gone, the stock is sold and a new investment awaits.

Any investment carries with it a degree of risk but those associated with finding great penny stock are much higher. That is the great penny stock debate - is the risk worth the reward?

Risk 1:
Due to the smaller company size involved, penny stocks are not traded on any major exchanges. This, in turn, means that the rules around the disclosure of information is much less (to almost non-existant) and you could be investing in anything from a well run firm with "corporate" values to a backyard lemonade making family. Find out the information you need to make an informed decision is a must, research, speak to different brokers, telephone the company if you have to.

Risk number 2

is the lack of liquidity that surrounds these investments. Markets exist on the balance of supply and demand. If there is a demand for stock, there is a market and the price the market pays is down to supply. Not many people want to buy lemonade making business' that they do not know much about, so having bought your penny stock (that you thought were great penny stock) you could have trouble selling them on. Coca-Cola shares on the other hand would be easier to sell because more people are likely to want to buy them.

The last risk is by far the greatest in my book. This puts millions of dollars into the hands of illegal trader world wide every year. This takes millions of dollars of hard earned cash from would be investors (often worried about retirement) and leaves the holding next to nothing. The last risk has been called "Pump and Dump".

Step 1:
The "so-called" great penny stock that you found, that you heard about through that internet forum, that you got that newsletter on.. Well that stock has had its share price pumped up by unscrupulous brokers leaking false information. With very little real information available, these brokers buy penny stock for next to nothing and are able to create a false market. They put information into the 'real world' through the internet, through the media, maybe they even dupe a respected analyst who mentions it on TV. Next you know the share price rises (but with no real business to support it).

Step 2:
Having 'pumped' the stock price upwards, the brokers now sell these great penny stock to unwary investors. Cold calls and spam emails are all used to target their victims who are generally male, middle aged and with money to spend. Pressured sales techniques (boiler room tactics) are used to coerse and force the investor into buying these stocks on the basis that they are 'going to be gold'. They will make your rich.

Having bought the stock for next to nothing, these criminal brokers have artificially inflated the stock price, pressured investors into buying and shut up shop. The demand for the stock starts to dwindle and with no real business fundamentals to keep the price high, they fall back to there next to nothing value. The investors are now left with their savings gone and a portfolio of (apparently) great penny stock that they cannot sell. Almost worse than nothing.

Penny Stocks are high risk investments with the potential for high rewards. If you can find that hidden gem, that stock that will make it through the ranks you're on a winner and you way to massive profits.

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