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Chapter Five: Getting to Know Wall Street

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Written by Timothy Sykes
Updated 12/8/2020 4 min read

Getting to know Wall Street

It’s a challenge getting to know wall street. Okay, I know you’re anxious to get started with penny stocks, but there’s one last set of concepts and terminology that we need to cover before we can set you lose in the trading world.

In this section, we’re going to discuss a number of different topics related to Wall Street and investing. Again, I know that drilling words and phrases isn’t the most exciting part of this process, but your education is vital. Never underestimate the power of education. Take the time to study these concepts and learn them well. Your future success as a penny stock trader depends on it.

MARKET EXCHANGES

First, while you’re probably already familiar with the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX), you won’t find penny stocks on these exchanges. Instead, it’s time to get familiar with some of the other different options that are out there:

  • the-pink-grey-sheetsTHE PINK/GREY SHEETS. The pink or grey sheet exchanges are where you’ll find the tiniest of all publicly traded companies. They’re very volatile, and they’re not usually liquid enough for pennystocking. Nearly all the companies on these exchanges trade under $5 dollars a share, but for our purposes, they’re usually not ideal due to their lack of liquidity.
  • otcbbTHE OTC BULLETIN BOARD (OTCBB). This is an electronic trading exchange for non-NASDAQ listed companies. Usually, the stocks found here have decent liquidity and volatility, and they rarely trade over $5 dollars a share. This makes them very good for pennystocking purposes.
  • small-capTHE NASDAQ SMALLCAP MARKET is my single favorite market of all time. This is the NASDAQ of penny stocks. These stock trade between $1 dollar and $10 dollars a share—it’s just beautiful, because these stocks are extremely liquid and they usually trade millions of shares. Sometimes, they get up to 10 and 20 million shares traded in a single day, and they’re very volatile at the same time. This exchange simply must be on your radar for pennystocking.
  • small-capTHE NASDAQ NATIONAL MARKET, not so much. This is all electronic trading and it’s mostly technology growth-oriented stocks, but they’re all pretty much higher priced stocks. This makes it irrelevant to pennystocking, for the most part.
  • American Stock ExchangeTHE AMERICAN STOCK EXCHANGE (AMEX).On this exchange, you’ll find tiny companies that tend to be volatile, but that still aren’t ideal for pennystocking because they have large price spreads and they’re generally illiquid. These companies may be trading at $3 dollars a share, but even if you want to buy in at $3 dollars, the spread might be too much from $3 dollars by $3.50 dollars, leaving you stuck buying in at $3.50 dollars. Even small changes like this can mean disaster for your profits.
  • New York Stock ExchangeTHE NEW YORK STOCK EXCHANGE (NYSE) is the largest exchange in the US, and it’s considered to be the most reputable of the bunch. Here, you’ll find your higher-priced stocks—your GEs, your Johnson & Johnsons and your Bank of Americas. There’s almost no volatility here, which—combined with the higher prices—makes it pretty much irrelevant to pennystocking. A lot of people ask me, “Oh, what do you think about this company—it’s traded on the New York Stock Exchange?” I ignore it. That’s what it comes down to.

Market Indices

Market Indices

Apart from the exchanges, you need to know your market indices. They don’t all affect penny stocks directly, but you’ll hear them enough in your time as a trader that it’s smart to get familiar with them now.

The first one is THE WILSHIRE 5000. This represents nearly all the stocks traded in the New York Stock Exchange, AMEX and NASDAQ. There are a few stocks for pennystocking here, but not many.

The RUSSELL 2000, on the other hand, is good. This index represents 2,000 of the smallest publicly traded companies, most of which come from the NASDAQ Smallcaps board (not the pink/grey sheets and the OTCBB). I love the Russell 2000—it’s one you’ll definitely want to watch.

The S&P 500 is probably the most well-known index of all time, other than the Dow Jones. This is a basket of a 500 widely held stocks, and it’s surprisingly irrelevant to pennystocking. In fact, there are no penny stocks at all in the S&P 500. It’s an interesting look at how the market as a whole is doing, but it’s pretty irrelevant to penny stock traders.

And, finally, the Dow Jones Industrial Average, which is a collection of 30 companies that Wall Street believes basically represents the overall stock market. Again, you won’t find any penny stocks here, so while it might be fun to watch, it’s pretty much useless for our purposes.

Wall Street Players | Traders

I can’t stress this enough, but you have to understand all the players involved in the game before you try and profit off penny stocks. Everyone has their own little angle—and everyone is out for themselves. If you don’t understand the motives of different Wall Street players, they’re going to rip you off, chew you up and spit you out.

First, let’s look at the traders—all the different people that are involved in the market.

  • Amateur TradersYou have AMATEUR TRADERSbasically, new suckers—all the time. Amateur traders come in with big dreams and they think the stock market is all nice and rosy—like a version of Candy Land where you can make real money. There’s a reason why they’re called suckers; it’s because they keep losing money and they don’t learn.It’s fun to take money from amateur traders, but you don’t ever want to be one yourself. Reading this guide is one of the best things you can do to protect yourself.
  • PipesINDEPENDENT PROPRIETARY TRADERS. If I do my job right, this is where you’ll be after following my teachings. An independent proprietary trader is a person who trades with personal capital, using somewhat sophisticated to very sophisticated techniques. Most of this activity will likely be in trading penny stocks, but you may also take some of your new found knowledge to branch out into other techniques as well.
  • private equityMARKET MAKERS. Market makers are the professional security dealers who are actually executing your trades. They influence penny stocks, and sometimes, it’s even their job to work penny stocks. Understand that they exist—you’re going to see them around all the time as you get started making trades.
  • Secondary offeringINSTITUTIONAL TRADERS are people who work for large firms with big money and huge portfolios. They never trade penny stocks, because they think it’s pure gambling and they just leave it alone. I thank them for that—and I’m glad they’re “too smart” for penny stocks. I don’t want to have to deal with them when I’m getting into and out of my trades.

Wall Street Players | Brokers

When I say “broker,” you might think of a company like Charles Schwab or Scottrade. But there are actually quite a few different kinds of brokers, and you have to understand how they’re all unique.

  • boiler-room“BOILER ROOM” BROKERS. If you’ve seen the movie Boiler Room or The Wolf Of Wall Street, you know that these are the brokers that use marketing techniques to promote stocks to amateur investors—aka suckers. They’re still hugely influential to penny stocks, even though they might not advertise or make as many calls as they used to. There’s still a lot of manipulation that occurs when it comes to penny stocks, but if you know how to spot these schemes, you can actually profit off them.
  • online-discountONLINE DISCOUNT BROKERS. These are the online websites that handle electronic trading for most penny stock traders. You can get an account set up with one of these services without much money so that you can start trading right away (visit this page for my preferred brokers).
  • floor-brokersFLOOR BROKERS. These brokers execute orders on the exchange floor, though the types of securities and commodities they deal with makes them pretty much irrelevant to penny stocks. Forget about them.
  • full-service-brokersFULL SERVICE BROKERS. These are small and large firms alike, though they don’t usually have good penny stock trading because they consider it to be too risky (and since they’re licensed, they don’t want people to lose all their money and sue them). They just don’t want to deal with the hassle. So full service brokers, the majority of them, they don’t even matter. They’re irrelevant for what you and I are going to be doing.

Wall Street Players | Promoters

I’ve already touched on promoters briefly, but I want to go into more detail on the types of promoters you’ll encounter as a penny stock trader. Remember, a lot of these guys are slimy, good for nothing scumbags who don’t care about ripping off gullible amateur investors.

But even though they’re not great people, you can profit by knowing who to watch and seeing what signals they’re throwing out.

  • penny-stock-pickersPENNY STOCK PICKERS. These are services that promise huge gains and that usually focus specifically on penny stocks, due to their great volatility and lack of active information. They love picking stocks, saying things like, “Oh, buy this stock—it’s going to go up 500%.” Please, that’s a joke. The people that listen to that type of stuff (except to time their pump and dump plays) deserve to lose their money.
  • gurus-stock“GURUS” AND STOCK PICKERS. These well-known names focus on hardcore research, but they rarely pick penny stocks, because again, there’s a lack of fundamentals from penny stocks companies. There’s not much for them to do in this sector, since they tend to focus on bigger companies.
  • print-tvPRINT, TV AND ONLINE ADVERTISERS. These guys provide entertainment and basic market commentary, but they’re actually legally prohibited from discussing penny stocks. This is such a great opportunity for us, because no one is talking about it. They can’t—it’s illegal for them to do so. So watch your TV, enjoy it, and be entertained. But then, come back here and learn the strategies they can’t tell you about to make some real money.
  • penny-stock-newslettersPENNY STOCK NEWSLETTERS. These are marketing machines that distribute research paid for by penny stock companies or their shareholders. Penny stock newsletters have to disclose if they get paid at the bottom, but the reality is that there are very few—if any—that are actually without bias. Don’t take them seriously, but do learn what you can from them to see where advertisers are pumping money into the market.(Want to know exactly how I profit off of popular penny stock newsletters? Apply now to join my millionaire trader challenge to learn more!)
  • analystsANALYSTS are professionals who focus on higher-priced stocks, but as a general rule, they’re not smart at all. The vast majority of them like to talk a big game and write up huge research reports, but they’re actually wrong most of the time. And it’s kind of funny that they’re irrelevant to pennystocking—they should be irrelevant to Wall Street all the time. But what can I say? I’m an idealist.
  • economistsECONOMISTS. Finally, these are the guys that analyze global and industry trends, which are again, largely irrelevant to penny stocks. Let them analyze their trends. Let them charge $30,000 dollars per report to these big companies that try and guesstimate trends. It doesn’t matter—it’s not going to help you make money. They just like to hear the sound of their own voices, so put them out of your mind.

Whew! There’s so much more I could teach you here—we haven’t even gotten into funds (think hedge funds or mutual funds), the SEC and all of its complicated rules and requirements, or the different types of institutional investors you’ll encounter.

Seriously, I wish I had another 200 pages to share all of this with you, but for now, we’ve covered enough of the basics to get you started. Keep learning about different Wall Street and stock trading concepts on your own time, but let’s dive into the meat of this guide—how to invest in penny stocks.


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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity.
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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”

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