A high-risk penny stock list is only for aggressive investors who are willing to invest in speculative stocks with money they can afford to lose

Generating a penny stock list with an above-average chance of success can be difficult.

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.

Not all penny stocks will go bust, but keep these tips in mind while you’re creating a penny stock list that appears to be of suitable investments.

Bad penny stocks seem to generate the most intensive marketing and promotion

Penny stocks do sometimes pay off, but there are many pitfalls to avoid. You should be aware that many penny stocks are little more than very well executed marketing campaigns. Penny stock promoters will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts and self-produced newsletters.

There are also some so-called news sites that will sell sponsorships to penny stock promoters. These are great opportunities for penny stock promoters but bad for investors looking for an unbiased opinion on a stock.

Penny stock promoters love to make deals—however small or indirect—with major, well-known firms. These deals are aimed at gaining the trust of investors as all penny stocks aim to do. The penny stock hopes that the link with a major brand will give them instant credibility, even if it far from guarantees any sales or profits.

Not all penny stocks and their promoters are out to cheat investors. But it’s important to approach any penny stock with a very healthy dose of skepticism.

Tips for building a penny stock list

• Only buy penny stocks with money you can afford to lose. Ultimately, Canadian penny stocks should always be a small part of any diversified portfolio.
• Spread your penny stocks out across different market segments. When making a list of penny stocks, we recommend investing in a range of markets. This includes software, biotech, technology, mineral exploration and so on.
• Avoid Canadian penny mining stocks that trade at unsustainably high prices 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.
• Look out for acquisitions. Acquisitions can bring “time-bomb” risk. Companies sometimes grow quickly by buying other companies. But it may also be the case that those selling the companies may simply want to bail out of a losing situation.
• Look for earnings or cash flow. A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.
• Apply our sell-half rule. Selling half your holdings after you double your investment 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.

The longer you play, the likelier you are to lose

If you lose money in speculative 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. You can get lucky in penny stocks, just as in lotteries. But 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. The longer or more often you play, the likelier you are to lose.

Ultimately, as we mentioned above, Canadian penny stocks should always be a small part of any diversified portfolio.

Did our penny stock list of tips help you understand penny stock investing better? Share your experience with us in the comments.