Tips to Identify the Best Penny Stock

Penny stocks are small company stock listed on the exchange. Investment in these stocks is precarious as these are very illiquid, low traded stocks and are prone to manipulations by big investors. Still, these stocks are on the investment radar of most of the small investors and traders as these stocks being small, have the potential to give high potential gains in percentage terms.

The stocks of these small, young and prosperous companies can give healthy return of 50%-100% or even 200%-300% in very short span of time. These returns are nearly impossible in case of blue chip stocks. It is the reason that these penny stocks remain lucrative for small investors for their investment purpose.

It is very tough to identify a penny stock which can be tomorrow’s rising star and give potential return because general investment ideas doesn’t apply on these stocks.

Tips to Identify the Best Penny Stock

Below are certain tips to identify a great penny stocks:

  1. Company’s business must have a history: It is advisable to choose a company’s stock for investment which has a several years of its business history rather than a startup. Business history ensures sufficient material for investor to analyze the company’s past financial performance an make him choose a healthy investment stock.
  2. Company’s Product or service must be Real: There are many penny stock companies floating in the stock market, which does not even have a real product or service. Most of penny stock promoters have registered their companies with unreliable product or service just for going public and raising the finance from the market. It must be ensured that the company’s product/service is recognized, real or is visible.
  3. Sufficient Promoter’s holding: Promoter’s holding is a key for any company interest and also for the investor too. Promoters being the real owner of the company must have sufficient holding in their company to ensure their interest in well-being of the company. An investor while choosing the penny stock must ensure that its promoters holding be at least 30-40%.
  4. Less Volatile: Generally the penny stocks are more prone to volatility, reason being they are illiquid in nature. An investor must examine the volatility criteria on both the factors i.e. trading volumes and movement of the stock.

The daily trading volumes need to be constant and daily stock movement must be reasonable and not much volatile.

  1. Potential Business and Earnings: The Company’s business model must be a potential one and also have strong balance sheet. Both the current and projected earnings must be analyzed, like current profitability and balance sheet must be strong and justified to the current market price and projected parameters like order book, future EPS etc. must show growth, considering present a base.

Company’s future guidance have more weightage than the current position, because these stocks are penny due to their current position but will only be a gem if business flourish in future. The company guidance must be carefully analyzed on all important parameters to get the required results from investments.

Penny Stocks- A Risky Trade

Penny stocks are securities issue by very small companies that trade at less than $5 per share. These are like a house of card, the framework is fragile and the structure can collapse any time. Although inexpensive, these stocks are highly risky investments and can be beaten down brutally and that too very quickly.

In spite of huge risk associated with the penny stocks, these stocks if chosen wisely can prove to be a gem for future. They can get double or triple in short span of time. Many investors had become millionaires by investing into these penny tips to identify penny stock at

Penny Stocks- A Risky Trade

Now, let us discuss certain risks associated investing into penny stocks.

The risks are as follows

  1. Lack of Liquidity: Penny stocks are risky to be traded as they are highly illiquid in nature. Any recent fall in this stock will result in lack or absence of buyers into these stocks and vice versa.
  2. Small Business: These companies have very small business and lack capital, human resource and quality management etc. which puts a constraint for growth of business in these companies. No growth means stagnant or negative movement for the stock.
  3. High Volatility: These stocks are highly illiquid, so becomes very easy for the operator to drive the stock movement either direction by means of manipulating the information though various means like SMS, fake press releases, emails etc.
  4. Scammers: These small companies are nothing less than a shell companies for scammers. The big investors like to buy at lower prices by way of manipulations and later dump at higher prices to small investors.
  5. Lack of information: These small companies are not popular and investor finds it difficult to collect the information for purpose of fundamental analysis. Even television channels don’t find it interesting to even show their financial results.

Penny Stocks- Trading Strategies

Penny stocks are the low priced, illiquid and highly volatile stocks. They require customized strategies for getting the right move. Hot penny stocks can be found with research and analysis and it is indeed a daunting task for the investors to seek for them. The task is difficult as there as the information about the companies is not available on the web and requires intensified research with various sources.

Below are some special investment strategies, which can be followed while investing into penny stocks. These are elaborated below:

  1. Ignore Pink Sheet Penny Stocks: Investors must stay away from the penny pink sheets or OTC securities as these are risky bets since they do not file regular financial statements with SEC and moreover do not meet the minimum listing requirements for major US exchanges. Investor can choose among host of low priced stocks trading on NASDAQ and NYSE.Penny Stocks- Trading Strategies
  2. Ignore Dividends: While choosing penny stock for investment, an investor must not analyze the dividend yield of the company. Many penny stocks that appear to have massive dividend yields are simply using a trick to catch a prey in form of small investor.
  3. Focus on Key Financials: There are many rumors floating in the market about these penny stocks to manipulate the movement of these penny stocks. Investor by avoiding these rumors, need to focus on earnings and sales numbers, expert analysts upgrades or downgrades and other key important factors for the purpose of analyses.
  4. Use Stop Loss: The penny stocks being illiquid and highly volatile tend to show large moves in either direction. Investor need to use a strict stop loss while buying the penny stocks to avoid huge loss, but at same time the stop loss must ensure the risk and reward to be in their individual favor.

Read more Trading Strategies by clicking here

Penny Stocks- Trading Strategies (Part 2)

The strategies to trade into penny stocks are continued in this article and they are as below:

  1. Use Limit Orders: It is an indispensible requirement for an investor to use limit order instead market order while buying penny stock. As these are low traded stocks, it will have small quantity seller bids above current price. Placing buying quantity at market order will purchase the required selling bids and making investor to buy the stock at a premium. So always fix a purchase price and place limit order and same is applicable in case of selling the stock.
  2. Set Price Target: Every investor while investing in penny stocks need to set a realistic target and once it get achieved should get out from that stock because the penny stock movement is very volatile. It’s up move is not reliable as it may fall immediately after moving up as in case of pump and dump schemes done by big investors.Penny Stocks- Trading Strategies (Part 2)
  3. Revise Stop Loss: Being these penny stocks, illiquid and volatile in nature, investor must keep a constant check on the movement of the stock. It is advisable to keep revising the stock loss in case the stock moves up against the purchase price. This practice is done to protect his gains and realize at least some profits on his holding and the realized money can be put to buy any other valuable penny stock.
  4. Sell Partial Positions Regularly: As said, an investor is advisable to set a realistic price target. If the stock is not able to provide the price target, that investor should sell his partial holding. For example: Investor holding 100 shares giving him only 20 percent profit as against target of 35 percent, he should sell his partial holding of that stock and book his partial profit.

Penny Stocks- Pros & Cons

Penny Stocks are low capitalization and low priced stocks. These stocks are basically illiquid stocks and that is the reason these are low traded and highly volatile stocks. Such stocks present a high risk for investors, who are often in the impression of making large and quick profits.

In spite of these notable concerns, the penny stocks are always in limelight of investors who like to make huge profits. The business of these companies is small and has great potential to grow in future and hence the stock price has potential to even get double easily.

There is always a debate among people that investment in penny stocks is good or bad idea. Let’s discuss the pros and cons related to penny stocks investment to get better idea on this.

Penny Stocks- Pros & Cons

The pros are:

  1. High return: An ideal penny stock investment by an investor can give huge returns. It can get double or can give return up to 200%-300% and that too in very short time.
  2. Low Priced: As these are low priced stocks, an investor can buy it in bulk quantity with small investment and hence bulk profits.

The cons are:

  1. High Risk: The penny stocks are very high risk stocks as these are small company stocks which have lots of constraints to grow their business. On an average only 1 out of 100 penny stocks become gem and rest just prove to be a nightmare for investors.
  2. De-Listed: There are chances that these stocks may get de listed from the stock exchange and not to be traded any more. It leaves investor to loose whole of its investment.
  3. Low Trading Volume: The trading volumes of penny stocks are quite less due to lower capitalization and lack of interest of big investors. It makes both buying and selling difficult for investor.