The Psychic Investor:
The layman's guide to online investing, finance message boards and investing in penny stocks.
You cleaned out your sock drawer and found that few hundred dollars you had stashed away for a rainy day. Last week's yard sale netted you another couple hundred and you just got your tax refund, that thank God you did not have to use for the daughters braces this year, so you now find yourself with $2500. You can finally follow that dream you have of becoming an online investor and stock trader.

While you can't wait to get started, you also don't have the first idea of how to begin. So you do as most people do and follow a friend's advice and open an account with the online broker they use. You may also do a Google search to compare prices, then open an account with the cheapest "per trade" broker you find.

Once you have your account open and are ready to trade, what next? Again you will do as most first time or inexperienced investors and you will buy a stock the friend recommends (probably the same friend who recommended your online broker) or you will do as thousands of investor do and start reading the finance message boards such as Yahoo or Raging Bull. Before long, you read a post by someone whose handle is something like "buy-now-or-miss-the-boat" . You just can't wait to jump in and start making money, because after all, everything you read made sense, and the world does need a cure for cancer. This company has a drug with a good story, is about to enter Phase I trials soon, and best of all, the stock is trading at a mere .60.

So you take the plunge, buy your first penny stock and complete the cycle of the online investor doomed to lose his sock drawer money.

See, while all of the above sounds reasonable and is the way most investors, the seasoned as well as the inexperienced approach online investing, it is also the way you lose that hard earned money. It's called "following the herd mentality". In investing, the "herd" is usually wrong. This is even more true when we are talking about investing in penny stocks. By definition, penny stocks are stocks that trade under $5.00 a share, but the real penny investors play the stocks trading anywhere from .10 and up. There is a lot of money to be made in these stocks. Most stocks trading at this level will eventually end up going bankrupt with many investors losing all their investment in them. Those who do are the ones who "followed the herd" . They did not understand what they were investing in. They bought the story instead of the stock and they bought it because they assumed it was cheap with no other purpose than hoping to make some money. The herd mentality.

Now a few will make money on this same stock, and often times will do so many times.This is happening at the same time you are losing money. How do they do it? And how are they different from you? It's fairly simple, they are the Psychic Investors. They do not follow the herd. They look for signs that most miss or interpret incorrectly. They have an entry point and an exit strategy. They visit the same finance message boards you do but they ARE the posters going by the handles "buy-now-or-miss-the-boat".

The Psychic Investor understands that in investing, there are no rules, but there are road signs. They read the tea leaves or tarot cards to predict the future movement of a stock price while the "herd" investors are reading charts and graphs that can only tell where a stock has been. Psychic investors understand that investing is an illusion and like the audience at a magic show, you only what the magician intends for you to see. So it is in the world of online investing. To survive in this game you must see past the magician and the picture he presents (i.e. the story of the stock, the current news, and message board hype) to what he is really doing. Find the Magician, follow him and you will become a successful Psychic Investor.
Who Are these Magicians of the Investing World?

Just who are the Magicians of the investing world? In the penny stock world, the magician comes to you in the form of Private Placement Investors. These are big money investors and the investments they make in a stock are referred to as PIPES. Now PIPES (private placement investments) are usually always a source to make a lot of that ole stuff we call money. It is also the manner in which most inexperienced investors lose money. PIPES are almost always dilutive to current investors. Dilutive to current investors means that the PIPE investors buy the stock for less than the stock is currently trading for and they usually get warrants to purchase more stock at a pre-determined price. (A warrant is an investment instrument that gives the holder of the warrant the RIGHT to buy the stock at a specified price but not the OBLIGATION).

You will often times find that penny stocks rely on PIPE investors for funding to continue operations until they turn the corner and can fund operations out of their own profit, which may or may not ever happen. While at first glance this would appear to be the stocks to run away from, in fact they are the ones that can make you some real money. The key is to not follow the herd. Don't follow the posters on the message boards. You must follow the Magicians. (the pipe investors).

How do you follow the big money or PIPE investors? Any search on Google, Yahoo or any other financial board will give you results to start investigating. You can use phrases like "company announces funding" or "private placement funding", etc....this will give you list after list of companies who have at some point announced they received funding. Now you must remember that everything in the world of penny stock investing is an "illusion". So while the company press release about the funding will always put a positive spin on it and make you want to just jump in and buy the stock, DON'T. That is for the herd. You are trying to become a Psychic Investor and as such your psychic abilities tell you , "there is more to this than meets the eye". So you start following your psychic thought instead of the message board posters.

So as a Psychic Investor, what is your next step? You must first determine if the financing is current. Make sure you're not reading about some financing that was done a year ago. The "punch" from that one has most likely already happened. Once you find a company who has announced a recent PIPE, you are ready to start work. You follow the signs just like a detective looking for clues. You want to know at what price the investors bought at "vs" where it's trading at now. You want to know what warrants are attached to the deal and at what price they become exercisable (called in the money warrants). Those are very important and the key to making your money. Chances are the stock is going to be above the PIPE investor's prices, so the warrants they receive as part of the financing package are the key. How far above the current price are they set? Often times this will be your "built in profit".

How do you play the Magician (PIPE Investments)? Just like the investors are going to do. There is much more to what they are going to do than just run the price of the stock up to the warrant price. They will be shorting the stock back once they achieve certain goals (which is where you can lose the profits you made if you do not have an exit strategy). This way they make money as the stock is rising, and also as they are shorting it back down. That is where the warrants will come into play.

Don't start out investing by following the herd. If you already are investing this way, it is never to late to change and become a Psychic Investor.

You now know the first step in finding a Company that is a potential penny stock investment and what makes it a candidate for your hard earned money. As you can see, investing in the company has nothing to do with what they make or produce. You don't care if they are curing cancer or making match sticks. You don't care what the "herd" is doing - what you are interested in is what the PIPE Investor is doing and what the structure of this particular PIPE is. It is here you will not only find your entry point but your exit strategy as well.
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