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Penny Stock I – How Does One Strategise?
Op-ed, Tradeable | 27 February 2013
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By: Simeon Ang
Articles (125) Profile

Penny stocks — those that sell for under a dollar — are perhaps one of the most misunderstood type of equity trading on the stock market today. In this day and age where hidden saints are as easy to find as real sinners, how does one really strategise for a profitable endeavour into these type of equities?

A Base Point
Firstly, the capital in which you begin with, has to be an amount in which you are absolutely comfortable with. In other words, you must be ready to have this money locked away for an extended period of time if things goes awry. Of course, if you follow the first rule, you would not have to worry too much about such a situation. It goes: “if a penny stock you have invested in earns you 100 percent returns, take your initial capital out of the equation and just ride the wave with the free stock.” CONTROL YOUR GREED! Never, ever stray from this rule!

Case Studies – CES
I know that it is probably quite difficult to picture this in your mind while reading this otherwise wordy article, so let me provide a case study. One stock that I have been following for some time that has relatively solid fundamentals and also fits the bill for a case study is Chip Eng Seng Corporation. Where, when and how should you act to execute rule 1?

Source: FactSet, graph on Chip Eng Seng’s recent stock performance

Basically, when you hit the 100 percent mark (indicated by the red arrow in the graph above), sell off enough (arithmetic says 50 percent) of your holdings to recover your capital. Do not look to plough more into the stock. Instead use the capital you have just withdrawn to diversify!

What Happens If The Market Dives?
Choi! Quick, touch wood! Jokes aside (it’s a Singaporean thing, though), a major caveat of this rule is if the stock suffers from a major blow that is not related to the company’s underlying fundamentals. Let us take a look at our two previous stocks again prior to the Great Recession of 2008/09.

Source: FactSet, graph on Chip Eng Seng’s stock performance from 2007 onwards.
Highlighted band indicates the Great Recession period.

When the stock market dove during the Great Recession, Chip Eng Seng traded down to around 15 cents. It did not dive because of any change in the underlying fundamentals of the company but it got hit because of a general dive in stock markets. Given that the fundamentals did not change, an investor who had earlier taken out capital should consider reinvesting the withdrawn capital into the stock. As seen in the graph, the reinvested capital could be taken out again at the moment the stock recovered and hit returns of a 100 percent. In this way, the investor would have had actually increased his/her net position substantially without any other out of pocket expenditures.

Penny Stock Froth
Penny stocks have been known to generate a lot of “froth” during a bullish market. This is characteristic of the stock itself as volumes increase heavily with a slight increase in value trading. It is important to note rule 2; “if a penny stock has a meteoric run for no rhyme or reason, lighten up a bit on your position.” Never leave profits on the table or the market will take them back from you.

This rule only applies if the stock jumps without any known basis. How can you tell if there is no basis for such a jump? Check the Singapore Exchange website! Companies are obliged to make announcements that will affect the company’s fundamentals in a timely fashion on the stock exchange website. If there are announcements, it is imperative that you ascertain if this will affect the fundamentals of the counter. If it does, in a positive manner, remember rule 1!

Two Good Rules To Follow
These two good basic rules are essentially investing habits that investors should learn to cultivate. These two good rules will put you on comfortable footing. But hold on to your horses first, stay tuned next week, for our follow-up installment of “How Does One strategise?” where we will look into further guides on your endeavour into the penny stock realm!

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Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

Chip Eng Seng Corp  0.630 -- --   
Business: [FY18 Turnover] Property development (70.2%), construction (21.8%), hospitality (5.9%), Corporate, property investments & education (2.1%).

Insight: Feb-19, FY18 revenue increased 27% to $1.1b, contr... Read More

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