How to Choose the Best Stocks for Penny Stock Investing
Want to know how to find the best stocks for investing your pennies? Investing in penny stocks can be a profitable financial investment if you take your time to choose the best penny stocks for your portfolio.
Penny stocks are stocks that trade for fractions of a cent up to about $5 per share. Companies with penny stock are generally high risk, small companies that need funding for starting up or avoiding bankruptcy. These stocks experience high fluctuations with an unproven track record.
Before investing in penny stocks, use these steps to find the best stock picks:
- Research industries with penny stocks that hold your interest. Understand the trends, cycles and tendencies of this market.
- Investigate companies with penny stock. Find out why the stock is labeled a penny stock. It could be that it is no longer qualified to be traded in traditional markets or it actually undervalued. Select several stock picks to conduct further research.
- Choose your top stocks and look at its activity. The best penny stocks have a consistent high volume of shares being traded, as it shows high liquidity for when you want to unload it.
- Judge the sustainability of your top stocks. Look at their business plan or determine if this company knows how to make a profit. If the business has to seek further financing then it may make your shares even less valuable in the future.
- Learn more about the dealer networks trading the penny stocks. Most penny stocks are traded on dealer networks like the Over the Counter Bulletin Board (OTCBB) and the Pink Sheets. Each network operates differently, for instance, trading takes place over the phone with OTCBB and electronically with Pink Sheets.
- Set a limit to the amount of risk you are willing to take. Penny stocks should only be a percentage of your total trading portfolio since they are high risk. Determine how much risk you can handle and do not spend more than your limit.
- Choose a brokerage firm. Conduct due diligence to ensure the brokerage firm is legit with proven revenues and a strong management team. There are many scams out there, so be sure that it provides its financials to the marketplace and does not spam the market to inflate their stock price.
- Question the brokerage firm. Find out if they tack on additional fees and charges. Some firms appear cheap until they start adding fees for inactivity, balance and cancellations.
Finding the best stocks can be challenging, as there is often a lack of information available to the public. Penny stocks are not required to file through the Securities and Exchange Commission (SEC) and are not publically scrutinized or regulated. Those that do have information available are sometimes not from credible sources. There are also no minimum standards for these stocks to be listed on the exchanges such as the OTCBB and Pink Sheets and feature low liquidity. The lack of history also makes these stock picks risky since they are either newly formed or approaching bankruptcy.
The best stocks result in high rewards for their high risk, but it is not likely that the next Microsoft can be found in this marketplace. The key is to research the company as much as possible, as well as its industry. Find out why it is trading on the penny stocks instead of a traditional marketplace, and if the company can realistically turn itself around. Question all sources of information to ensure credibility and set limits for yourself to reduce losses.