Can you make money off of penny stocks? It is possible, but only if you select the highest-quality penny stocks—and follow these rules
Investors looking to add to the aggressive portion of their portfolios may turn to the higher-risk strategy of buying speculative penny stocks. Penny stocks do sometimes pay off, but more often than not, there are many potential pitfalls.
Can you make money off of penny stocks? There is money to be made, but you will likely lose more often than you win. If you decide to start investing in penny stocks, below is a list of penny stock investment strategies you can use to make sound investment decisions.
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.
Can you make money off of penny stocks? Maybe—if you can avoid these three common penny stock investing risks
Risky ventures: As mentioned, buying penny stocks can lead to a big payday if you’ve made the right choice. But the odds against success are high. Penny stocks are almost always involved in riskier ventures, such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software. It’s hard for any new company to grow into a profitable business, and it’s even harder in pioneering fields.
Low-quality stocks: Buying low-quality Canadian penny stocks is one of those things that can appear to be successful before it goes badly wrong. Some get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.
Marketing promotions: Penny stock promoters love to make deals—however minor or indirect—with companies holding major, household names. Any link to such a company can give penny stock promoters instant credibility, especially with investors who are willing to buy penny stocks.
In fact, when they get a deal with a major company, promoters go to great lengths to make it seem bigger than it is. In fact, when a penny stock shoots up on the news of big-company involvement, and the property/program/revolutionary software is still in the early stages of development, it’s often a good time to sell.
Can you make money off of penny stocks? The best strategic components for investing in penny stocks
Here are some tips we consider when we analyze penny stocks for aggressive investors.
Focus on high-quality, reputable management. We want to see experienced management with a proven ability to develop and finance a company.
Look for a sound balance sheet. We also like to see a sound balance sheet in all the penny stocks we recommend. We like to see enough cash to keep operations going without the need for frequent dilutive share issues at low prices.
Look for hidden assets. While you’re looking at the balance sheet you might also want to see if there are any hidden assets like real estate at historical prices, or heavy research spending.
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.
Look for a focused company. You should 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.
Focus on up-and-coming technologies. To do this, you need to know how technology is changing. For instance, the immense popularity of wireless devices, like the iPhone and tablet computers, stepped up demand for faster, more reliable wireless networks.
Avoid investing in penny mining stocks that trade at unsustainably high prices. They may be high because of broker hype or investor mania about the underlying commodity (such as gold). Instead, we focus on reasonably priced Canadian penny mining stocks with favourable geology.
Can you make money off of penny stocks? It’s possible, but only if you follow our tips above—and utilize our Successful Investor approach for the bulk of your portfolio
Ultimately, penny stocks could make up a small part of any diversified portfolio. But you should only buy the most speculative of them with money you can afford to lose.
Remember to spread your portfolio out across most if not all of the five main economic sectors: Resources; Manufacturing; Finance; Utilities; and Consumer. By diversifying across the sectors, you also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.
Our three-pronged Successful Investor philosophy takes that general description a little further. In addition to spreading your investment money out across most if not all of the five economic sectors, we advise you to invest mainly in well-established companies, and focus on companies that are outside the broker/media limelight.
With so much risk involved, what is the attraction of penny stocks for you? Is it the potential for a big payday? Perhaps it’s the thrill of the unknown?
Learn everything you need to know in 'Buried Treasure: Canada's Penny Stock Guide' FREE Special Report from The Successful Investor.
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