Archives: 2008 July

A share is a certificate of ownership in a company. The shares of BHP, for instance, are each a tiny piece of ownership of the company BHP. If a share in BHP is purchased, the purchaser now owns a little piece of BHP. BHP, as of writing, had over 1,750,000,000 shares on issue. Once a share is purchased in a company like BHP the share can be sold at the discretion of the owner of that share.

As a share represents a share in the ownership of a company, a shareholder has a right to a say in how that company is run. This is often a theoretical right as voting on running the company is conducted on a ‘one share, one vote’ basis. Obviously if a shareholder has one share of BHP that shareholder has only one vote out of a possible 1,750,000,000 votes. Owners of larger number of shares have more votes and therefore more of a say in the running of the company.

What is the price of a share?

A trader telephones her broker and says, “I am interested in shares in BHP, what is the price?”

This fourth section of this serial treats the subject of the debt/equity ratio, another important part of the successful methodology used by Warren Buffett. As a matter of fact, it’s something that Buffett considers crucial when picking his stocks. Much like the return on equity that was explained in the third section of this serial, this ratio is commonly employed in the financial world, however, Buffett has the ability to use it in a way that nobody else does.

The components that make up the debt/equity ratio are fairly obvious and I’m certain that many people first heard of it in high school in a commerce or business class. But just in case, there’s still some confusion, I will give a quick, brief explanation. The debt/equity ratio is given by total liabilities of a company divided by shareholders’ equity.

Both components of the ratio can be easily obtained by accessing a company’s balance sheet, which is also sometimes known as a statement of financial position. This process of finding and taking these numbers is known as taking the ‘book value.’ However, if the debt and equity was being traded publicly, you are able to use the market value if you choose to. Furthermore, you will have the option of using a combination of both.

Penny stock trading is not an ordinary field. Imagine stock exchanges like NASDAQ and NYSE, how disorganized it looks like. All the noise from every stock broker’s bidding shouts. Every voice must be heard in one trading floor. But surprisingly, that’s actually the orderly way of closing stock deals. Ironic isn’t it? It’s a lot different in online penny stock trading.

You only have your monitor to rely on. In there you see figures from the stock market trend. You see penny stock prices and you see company information. You also meet other investors across the globe that you’ve never met before.

Online penny stock trading has become a favorite past time among stock investors who prefer to do their business in the comforts of their home. But even if there is a different feel with just having the monitor to check your penny shares with, it still isn’t automatic. In fact it can never be.

The single best perk to trading the penny stock market is the amazing leverage that it provides traders. That’s why there is nothing more perfect trade for new or beginner stock market traders.

Many of the stock analysts always tell new traders to invest their money in well known dependable companies. They tell you to invest in companies like Wal-Mart or Chevron. It’s a great idea but unfortunately most new traders don’t have $50,000 to invest in a portfolio of these kind of stocks.

Being that most new traders are strapped for money, let’s say they open their account with $3000. How far do you think that $2000.00 is going to stretch when investing in these kind of blue-chip companies? Not very far. They probably wouldn’t even be able to buy 100 shares of one of these companies.

Let’s use this same example and see how well it works if the trader just invested penny stocks. Think how far that money would stretch. They could buy 6000 shares of one 50 cent stock. He could even build an entire portfolio of penny stocks with that kind of money.

Many people feel penny stocks should be traded in a much different style than the regular stocks, but that is simply not the case.

There are a few things to look for when you are trading penny stocks. Some of these are fundamental data, technical analysis, and news.

When it comes to fundamental data, it’s important to study the company’s statements. These kind of statements include statement of cash flows, income statements, and balance sheets.

Research the company’s quarterly statements. See if each quarter on the income statement whether their net profits have steadily increased or decreased. Take a look at the balance sheet and notice the debt to asset ratio. Are debts increasing while assets are decreasing or vice versa.

If you are looking to find the penny stocks that are ready to explode then you are going to have to do some technical analysis. Pull up a chart!

There is no need to put a bunch of indicators on your charts. Learn to understand price action and movement. You’ll be able to spot support and resistance without the use of any indicators. When a penny stock is going move chances are breaking a resistance line to do it.