3 Awful Times to Buy Stocks

There Are Three Times When Investors Should Be Extra Cautious

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••• Newspaper Covers Mans Face. Grove Pashley

As the authority on penny stocks, I can identify dozens of the best patterns or times to load up on shares.  Typically, it is almost always a great time to buy low-priced shares as long as you are spotting the highest-quality companies.

There are three phases to avoid, however, whereby your investment dollars might get burned up pretty fast.  In fact, one of them is going to happen right now, so be warned.

1. Market Bubble Formation:

First, I should clarify - the absolute best time to buy penny stocks is at the beginning of the formation of a stock market bubble.  Even low-quality shares will soar as the bubble inflates.  Of course, all good things must come to an end, and in this case, that will happen with an almost tangible "POP!"

Since penny stocks are much more volatile than larger corporations and more lightly-traded, they both benefit the most from a bubble of over-valuation, just as they get hit the hardest when the good times end.  

For example, a large blue chip corporation may gain 30% in a bubble, then lose that again.  Meanwhile, a typical penny stock may see a gain, then loss, of 70% or even more, both on the way up and down.

2. Margin Calls:

When the stock market has a correction, or several down days or weeks, investors who are leveraged (using the money they borrow from their broker to trade) see a magnified loss.

If a portfolio has $5,000 in value but has bought $10,000 worth of stocks, a 15% loss may be more like 30% for leveraged investors.

The problem is that when leveraged accounts suddenly drop, brokers usually require the investor to cover a portion of their outstanding loan.  Simply put, they are forced to sell some holdings to bring their account back into good standing in terms of the percentage of borrowed money in the portfolio.

The broker makes a "margin call," and the individual must either deposit more money and assets into the account or sell some of the holdings already in it.

Penny stocks, being the most speculative portion of most people's accounts, often take the brunt of any margin calls.  You may see IBM and McDonald's drop in price, giving rise to margin calls which result in selling of the lowest-priced assets (collateral damage) rather than the stocks which are actually sliding lower or the actual culprits (IBM and McDonald's in this case).

3.  Tax Loss Selling:

To pay less capital gains tax, investors can take capital losses. They do this by selling shares which are trading lower since they purchased them.

As penny stocks are thinly traded, even a small amount of selling can really push the prices down. What happens in November and December each year is that investors start liquidating losing positions to generate tax losses, which then offset their capital gains. They pay less tax, while certain penny stocks which have fallen in price get pummelled by increased selling.

This becomes an opportune time to look for excellent bargains in some penny stocks you have been watching. However, this can be a dangerous time for penny stock investors if their shares get hit by any degree of tax loss selling.

Of course, this artificial selling pressure subsides, then eventually stops completely, as of January 1st.

Penny stock investing is fun, lucrative, and exciting. Just be aware that it sometimes is not so great when a bubble is about to burst, weak markets are generating margin calls, or we see heavy tax-loss selling.