About three years ago, Tim Grittani decided to begin trading stocks with his life savings of $1,500. Today, the 24-year-old's portfolio is worth more than $1 million.
How did he do it? Not by buying and selling stocks of large and well-known companies like Apple (AAPL) or Ford (F). Instead, Grittani trades penny stocks -- very small companies that typically have a price below $1.
He's the first to admit that it's a risky strategy. And it's not for everyone.
"I've been trading every single day for almost three years, and it's been a slow, day-to-day process," Grittani said. He spends the entire trading day in front of a computer screen, in order to buy and sell stocks at the right time. He is sometimes in and out of stocks within minutes, and the longest he ever holds shares is a few days.
So why trade penny stocks? Many of these companies are speculative because they are thinly traded, usually over the counter instead of on major exchanges like the New York Stock Exchange. The Securities and Exchange Commission warns that "investors in penny stocks should be prepared for the possibility that they may lose their whole investment."
Plus, penny stocks are notorious for being part of so-called pump-and-dump schemes, in which scammers buy up shares and then promote it as the next hot stock on blogs, message boards, and e-mails. Once the stock price is artificially pumped up by all the talk, the scammers sell their stake, leaving unsuspecting investors with big losses.
But Grittani has been able to profit because it's such an inefficient market. He knows what to look for and recognizes how to make money out of pump-and-dump scams without doing any pumping or dumping himself.
In fact, the trade that officially pushed the value of his portfolio over $1 million was a short bet against a company that had been the target of a pump-and-dump scheme. When investors short stocks, they borrow shares and sell them with the hope of buying it back later a lower price and pocketing the difference.
Grittani had noticed shares of a company called Nutranomics, which trade over the counter under the symbol NNRX, had shot up due to what he felt was the manipulation of scammers: the stock had tripled in just a month. Last Monday, Grittani detected that the stock was losing momentum, and he felt that at the very least a small pullback was imminent.
Sure enough, the stock tumbled almost 60% in the span of 23 minutes. Though he didn't benefit from the entire plunge, Grittani walked away $8,000 in ten minutes.
Grittani learned about penny stocks from Tim Sykes, who is famous for turning his Bar Mitzvah gift money of about $12,000 into millions by day-trading penny stocks while in college. For the past five years, Sykes his been teaching his strategies through the sale of instructional newsletters and video lessons.
Grittani first learned about Sykes in early 2011, when he was a senior finance major at Marquette University in Milwaukee.
Earlier on in college, Grittani played poker and made wagers on sports games to make money. He had some luck, including a $9,000 win from a sports bet. But he lost all of that over the course of a year and decided he needed to quit gambling. So he took a shot at investing.
"I started by opening an account with $500 to see what I could pick up on my own," said Grittani. "But within a few weeks I lost half my account and decided I needed some outside help."
Grittani scoured the internet and eventually came upon Syke's story. He spent a few months learning about Syke's theories and eventually started trading. The first few months were rough. At one point he was $1,300 in the hole. But within six months, Grittani made his first big winning trade.
After receiving an e-mail about what he felt was a pump-and-dump scheme targeting Amwest Imaging, Grittani plowed $3,000 into the company. Figuring that it would eventually collapse, he sold his stake within 10 minutes. But that was enough to book a 70% gain, or $2,000. (Amwest Imaging has since changed its name to Intertech Solutions, trading under the symbol ITEC.)
"That's the kind of volatility penny stocks have when they are promoted. The key is to buy them ahead of the crowd," said Grittani.
But Grittani and Sykes both go out of their way to point out that trading in penny stocks is not the same as long-term investing. This is not a strategy for your retirement accounts.
"I think it's mainly for people who are gamblers," said Sykes, who taught himself all about trading. "But at casinos you play with low odds. With penny stocks, there are patterns that are very predictable."
Along those lines, Grittani's biggest win over the past few years was a quick trade in Fannie Mae (FNMA). While there wasn't a particular news catalyst that prompted him to look at the government-sponsored mortgage giant, Grittani spotted increased volume and activity that suggested the stock would tank and then bounce back. Through a combination of long and short trades, he raked in $215,000 in one day.
So what's next for Grittani now that he's hit the $1 million mark? He plans to continue to day trading for at least another two years before taking time off to travel.
And though he's earned a million in trading profits, Grittani says he'd like to eventually get to the point where his personal net worth exceeds $1 million. He currently estimates he's worth $650,000, and anticipates he'll reach his goal "within the next year or two."