Buy Penny Stocks Like Hedge Funds Do: A How-To Guide
Have you ever wanted to buy penny stocks that top Wall Street hedge funds and prominent investors do? It’s not as mysterious as you might think. In fact, with a bit of diligence and elbow grease, you too can invest like some of the top investors in the stock market today. This article looks at four ways to find out what insiders and institutions are doing with their money. Then you can be armed with the right tools to find the same penny stocks to buy according to top investors.
Whether you’re a day trader or looking for ways to invest in penny stocks, it’s essential to know why certain companies’ shares are moving. If you have experience in the market, you would agree that some catalysts are more impactful than others. These same catalysts may also leave a longer-lasting impression on the market. This is where you’ll see penny stocks breaking out for days instead of just a few hours.
One of the most important things that any retail trader wants is an edge. Knowing about something first not only feels good, but it can also be an advantageous proposition too. One of the ways to gain this edge is by searching for data. Exactly what type of data is based on your specific goal. Are you looking for high-volume penny stocks to buy?
You might want to find a penny stock screener that alerts you when unusual trading volume comes in during a short time. For instance, some traders look for unusual spikes “over the last 2 minutes” or the last 5 minutes. A small snippet of information like that can give traders a heads-up that “something” could be up. The next step is placing that on a watch list.
While that strategy might be good if you’re day trading, others may be better suited for something a bit longer term. That’s where today’s guide comes into play.
Penny Stocks To Buy: Using SEC Filings To Your Advantage
The Securities and Exchange Commission (SEC) requires companies, insiders, and money managers to timely file certain statements. But ask retail traders if they check out filings, and a fair amount do not. They’re wordy, have plenty of legalese, and can become difficult to reduce the info to something actionable if you’re not familiar with what you’re looking at. Unfortunately for them, these filings will reveal a lot more information that isn’t expanded on in press releases or announced publicly (besides in a filing).
Here’s where you can gain the edge over the average retail trader, and we’ll show you below. You can see which insiders and institutions are buying or selling penny stocks. All of those details might not be reported by the company in an announcement.
It’s so important to not only understand how to trade stocks based on technical analysis but also have a sound understanding of basic fundamental analysis. Let’s discuss some filing types that can reveal timely information if you’re looking for a potential catalyst behind a move. Are there other filing types? OF COURSE! However, if you’re an active trader and want a “go-to” for seeking out quick info, here are some filing types to put together an action plan before buying penny stocks.
On a side note, if you need to access this information, we offer it on PennyStocks.com. Search any company’s symbol in our “Ticker Symbol” search box, and under the company’s “Detailed Quote,” you’ll see different tabs. One of these tabs is labeled “SEC Filings.”
Now let’s get down to business.
What Are Schedule 13D, Schedule 13G, and Schedule 13F Filings?
These Schedules involve parties reporting ownership of stock over 5% of a particular equity class in a company.
The SEC defines Schedules 13D and 13G as beneficial ownership reports. “The term ‘beneficial owner’ is defined under SEC rules. It includes any person who shares voting or investment power directly or indirectly (the power to sell the security).”
13G & 13D Filings
Furthermore, when a person or group acquires beneficial ownership of more than five percent of voting shares, they’ll file a Schedule 13D. A 13G reports the acquisition and other information within ten days after the purchase. These filings would be highlighted by traders looking for “Whale” trades as they generally connect to large funds or investment trusts.
Because of this, it must be declared. There are much longer format definitions of these forms. The main difference involves the size of the investor. A Schedule 13D gets filed by an “active investor” and one owning more than 20% of a company’s outstanding shares.
A 13G pertains to “passive investors” owning less than 20% of a company’s outstanding shares. Once a “passive investor” reaches over 20% of the OS, they need to start filing 13D statements. These are important because we’ll see which large funds or investors are taking a more significant position in a company. These typically lift sentiment for a given company.
Schedule 13F filings are where things get fun. 13Fs are quarterly reports required to be filed by institutional investment managers with at least $100 million in assets under management. Don’t think top Wall Street hedge funds own penny stocks? Think again and read one of the many articles below:
One of the downsides to looking at these filings is that they are published after trades are made. So it will be up to you to decide if the data is valid when you find it.
What Is A Form 4 Filing?
Form 4s are something that experienced traders look at from time to time.
What is SEC Form 4? According to the Securities And Exchange Commission, it is a “statement of changes in beneficial ownership.” It must get filed with the commission whenever a material change happens in the holdings of a company’s insiders.
You would consider someone an insider if they are directors, officers, or shareholders owning 10% or more of a company’s outstanding shares. Form 4 filings break down the reporting person’s relationship to the company and give important information about purchases or sales of shares (“acquired” or “disposed of”). They also will show company stock options issuances, grants, and even transactions related to employee benefit programs. Below is a sample of what a Form 4 looks like using Apple’s ( NASDAQ: AAPL) Tim Cook as an example:
It’s essential to read these forms carefully. If you want to find stocks with insider buying done through the open market, then pay attention to the notes. The reason is that when companies raise money at set prices (usually at a discount), insiders might participate. In this case, the insider hasn’t bought “sporadically” in the open market; they’ve participated in an offering that average retail investors don’t usually have access to.
Pay Attention To The Fine Print
You’ll also want to pay close attention to the notes when insiders sell. For instance, management may have specific pre-set selling (or buying) plans. A 10b5–1 program allows insiders to sell a set number of shares at a predetermined time. This helps them avoid any accusation of insider trading on non-public info.
Most notably, insiders like Amazon’s ( NASDAQ: AMZN) Jeff Bezos, Meta’s ( NASDAQ: META) Mark Zuckerberg, and many others use this type of plan. On the flip side, more recently, people like Elon Musk have made unplanned sales and purchases of stocks like Tesla ( NASDAQ: TSLA) and Twitter ( NYSE: TWTR). This is likely why you see much more volatile action around the timing of Musk’s filings than when Bezos or Zuckerberg made theirs.
Penny Stocks & Trading Basics
These filing types are just a few to use to find “Whale” trades and insider buying “before the market knows.” In actuality, all you’ve done is taken an extra step to find publically available information and use it to your advantage.
The goal is to make money with penny stocks. There are many ways to go about it. So, whether you’re trading them or investing in penny stocks, make sure you take time to do the right amount of DD based on the type of trade or investment you’re preparing to make.
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Originally published at https://pennystocks.com on June 16, 2022.