Investors searching for Canadian penny stocks to buy can up their odds of success if they look for stocks that meet our eight requirements

Investors looking for Canadian penny stocks to buy to add to their portfolios need to be careful with these risky investments. And above all, Canadian penny stocks should make up only a small part the portfolios of most investors—and you should only buy the most speculative of them with money you can afford to lose.

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 can also suffer from large price fluctuations, so any bit of news may cause a penny stock’s price to rise or fall.

If you’re looking for Canadian penny stocks to buy, here are some tips

Here are eight of the Successful Investor tips we consider when we analyze penny stocks for aggressive investors.

1) We compare the market cap of the stock with the estimated value of the company’s reserves, future product sales and so on.

2) We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.

3) We avoid stocks trading over-the-counter where regulatory reporting and so on is lax.

4) We like to see a strong balance sheet with low debt. Even better, we like to see a major partner who can finance a mine, software and so on to production.

5) We want to see experienced management with proven ability to develop and finance a new business.

6) We look for well-financed penny stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.

7) We insist on political stability. For example, mineral exploration is risky enough without the threat of expropriation or onerous taxes.

8) We avoid penny stocks that promote themselves too aggressively (or do so misleadingly).

Are Penny Stocks Worth It? Learn everything you need to know in 'Canada's Penny Stock Guide' for FREE from The Successful Investor. Canadian Penny Stock Guide: Find where to find Penny Stocks that pay well.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Canadian penny stocks to buy nonetheless entail lots of risk

Penny stock bubbles have helped investors profit. However, when the bubble bursts, prices of low-quality stocks inevitably come crashing down.

After all, it’s much easier to launch a stock promotion than it is to create a successful, lasting business.

Penny stocks tend to be more speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software.

Should marijuana companies be considered as options for investors looking for Canadian penny stocks to buy?

Investors routinely ask about Canadian marijuana stocks—including pennies.

We advise staying out of stock promotions for highly speculative penny Canadian marijuana penny stocks or similar promotions for anything else. They attract the wrong kind of people. Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion.

These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet. One recent “penny pot” investing stock scam almost seems like an MBA-style case study on how to launch one of these frauds online. To avoid being taken in, it pays to read more, and to think before you invest. This includes start-up or speculative marijuana stocks.

Use a bottom-up investing approach while looking for any stock, including penny stocks

Using the bottom-up investing approach, you focus on understanding what’s going on, rather than trying to predict what happens next. You could call this descriptive finance. You delve into earnings, dividends, sales, balance sheet structure, competitive advantages and so on.

From there, it quickly becomes obvious that there’s an awful lot you don’t know about the risks associated with the investments you’re considering. So you try to design a portfolio in which the risks offset each other.

Using the top-down approach (which you might call predictive finance), you downplay what’s going on now and try to figure out what happens next. You may zero in on trends in stock prices, the economy, interest rates, gold and so on. You may disregard most details. Or, you may focus on a single key trend, event or detail.

Over periods of five years and beyond top investment honours mostly go to a member of the bottom-up crowd. That’s partly because bottom-uppers tend to make fewer big mistakes. This lets their gains accumulate. This also leads to longer holding periods, which provide greater tax deferral and lower brokerage costs.

Bonus tip: Smart wealth building strategies promote selling if you doubt the integrity of insiders

It’s always a good investing strategy to sell your shares in a company if you have any doubts about the integrity of the people in charge—and that includes penny stocks. In other words, if you think a company is run by crooks, you should sell right away, no matter how attractive it seems as an investment. There are no limits to the ways in which unscrupulous operators can and will cheat you.

Note though, that to profit from this safer investing rule—that is, to use it to enhance your long-term returns, not just avoid losses—you need to apply it in a moderate fashion. You need to distinguish between lack of integrity on the one hand, and naiveté or poor judgment on the other.

What Canadian penny stocks are catching your eye now, and why do they interest you?

Do you stay away from all penny stocks, or do you like to keep a few as a small percentage of your portfolio?