You need to follow the seven tips in this article if you want to find top penny stock picks.

Want tips for investing in top penny stock picks? Read on.

7 tips for making money with top penny stock picks

Penny stocks do sometimes pay off. And when you see a list of top penny stock picks online or elsewhere, you may be inclined to invest. But there are many pitfalls to avoid. And while some penny stocks do take off, you should be aware that many penny stocks are little more than very well executed marketing campaigns. Below are seven tips that you can use when analyzing top penny stock picks and to avoid the biggest risks.

1. Look for well-financed companies: To profit in penny stocks, you should look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
2. Look for a strong balance sheet: High-quality penny stocks should have strong balance sheets with low debt. It’s even better if they have a major financing partner.

The power of dividends The best dividend stocks can turn an average portfolio into a strong, fast-growing one. Over the years, Pat McKeough has shown investors how to convert high-quality dividend stocks into greater earning power. Now, Pat shows you how to make it work for you in his complete guide to dividend investing. Get his free report now. Read this NEW free report >>

3. Look for strong management: Look for an experienced management team with a proven ability to develop and finance a mine, product or service.
4. Look for stocks trading on a well-regulated exchange: We think you should avoid stocks trading “over-the-counter”, where such things as regulatory reporting are lax. Stick to penny stocks trading on regulated exchanges like the Toronto and New York stock exchanges.
5. Look past the hype: Avoid stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
6. Look for reasonable share prices: Compare the market caps (The total dollar value of all of a company’s outstanding shares) of the stocks with the estimated value of their assets or future earnings streams. Only a few penny stocks will successfully launch a product with enough success to justify the current share price and avoid collapse.
7. Look for a focused company: Automatically rule out investing in companies that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on developing a saleable product or service, rather than hyping their story.

Beware of penny stock promoters

Penny stock promoters love to make deals—however minor or indirect—with major, household name companies. The link with a major gives them instant credibility, especially with investors who are willing to buy penny stocks.

However, many penny stock promoters aim to make companies seem bigger than they appear.

For example, when they get a deal with a major, promoters go to great lengths to make it seem bigger than it really is. Instead of announcing that the big company has invested, say, $50,000, penny stock promoters may issue a press release that says the two companies have entered into a “multi-stage development plan”. The release may say the major has agreed to spend “up to $10 million” or whatever. It will usually provide a toll-free number or an online link for investors who wish to order the enticing brochures.

The longer you invest in penny stocks, the likelier you are to lose

If you lose money in speculative pennies or other low-quality stocks (or ETFs that invest in low-quality stocks), you may think your main mistake was bad timing. That’s a misconception. All penny stocks rely on luck to become wildly profitable. If you play long enough, the “house odds” eventually triumph over any run of luck.

In penny stocks or games of chance, the odds are against you. So, time works against you. The longer or more often you play, the likelier you are to lose.

That’s also why we think you should apply our sell-half rule.

Selling half your holdings after you double your earnings is a good strategy for any high-risk investment, but especially so for penny stocks.

This can give you a clearer perspective on what to do with the other half of your investment. After all, if you are too slow to sell speculative stuff, your profits and even your principal can evaporate all too quickly.

In general, penny stocks have lower trading volumes or liquidity, and this lack of liquidity means it may be more difficult to sell a stock when you want to. They also suffer from large price fluctuations, so any bit of news will cause a penny stock’s price to rise or fall

The reality is it’s easier to launch a promising company than to create a successful business. That’s why only a minority of penny stocks ever go on to significant success. And while penny stocks can be a worthwhile addition to the aggressive portion of a diversified portfolio, you should in general only buy them with money you’re willing to lose.

Do you own top penny stock picks? What has your experience been? Share your story with us in the comments.