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.
Below are certain tips to identify a great penny stocks:
- 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.
- 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.
- 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%.
- 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.
- 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.