NEW YORK ( TheStreet) -- Penny stocks, according to different textbooks, are labeled as stocks that trade at relatively low prices and market capitalizations. However, there is some confusion in this, because some of the lower-priced stocks are massive companies with real revenue. Well, how does this tie in with institutions not being able to trade or be invested in some of these "penny stocks" and with the average retail investor/trader?
An epic example is the day Bank of America (BAC - Get Report) almost became a "penny stock." It plunged under $5 last year. Something terrible would have happened to that stock had it closed under $5. The day it plunged to the $4.90's, I had my finger over a 10,000 share short order of Bank of America! But why? One known rule is that most mutual funds and institutional money cannot be in stocks that are under $5.
I was waiting for it to close under $5 and this would trigger a massive computerized selloff by these funds; and I would profit huge from this. As the stock closed that day at $5.01, I switched to a long position instead, because they weren't able to close it under $5; the stock soared the next day and following weeks to the $7's, as the bottom had been put in.
Apparently, millions of other traders agreed with me that day; now the stock trades at $12 to $13. Not a bad return just knowing how "penny stocks" and institutional money flow works.
Another example of a legit "penny stock" is Zynga (ZNGA - Get Report), with a billion in revenue and a growing online gambling market that is being legalized. This stock trades at $3.50, we entered at $2.50. Here are three reasons for our entry.
Zynga could be a potential buyout target for big social networks.
Management at Zynga are laying off hundreds of employees and closing offices and games
that don't do as well, and are trimming overhead and expenses. The stock is consolidating, momentum had changed to
the upside, possible move back to the $6's or higher.
If you follow a specific strategy, such as the ones offered through mentorships at www.csquaredtrading.com, then you can learn to narrow your universe of stocks and stack the probabilities in your favor as you fight the "Retail Joe" trader, and not the institutional money. Follow us at csquaredtrading -- Written by Ben Brinneman in Charlotte, NC At the time of publication, the author was long ZNGA, although positions may change at any time. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.