Spotting good Canadian penny stocks to add to your portfolio is difficult, but it is possible—especially if you follow these key tips.

If you’re buying penny stocks that will be perpetual money losers, they will eventually go broke, no matter how impressive their technology. But if a junior company makes even a little money, it can stay in business and perhaps reap the bonanza of a new product or service.

Diversifying helps this positive effect, and since you should only invest in the most speculative of good Canadian penny stocks with money you’re willing to lose, you may have a greater chance at winning.

Even good Canadian penny stocks come with sizeable risks for investors

Periodic penny stock bubbles have helped investors profit. However, when the bubbles burst, 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.

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Follow these tips to spot good Canadian penny stocks worth taking a chance on

• Avoid penny stocks that trade at unsustainably high prices because of broker hype or investor mania about the underlying commodity.
• 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.
• 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.
• 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.

Cryptocurrency firms may not be good Canadian penny stocks to buy

Investors routinely ask about Canadian cryptocurrency stocks—including pennies.

We advise staying out of stock promotions for highly speculative Canadian cryptocurrency 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 crypto” 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 cryptocurrency stocks.

Here are two of the biggest risks you face when you invest in lower-quality Canadian penny stocks

1. Low-quality Canadian penny stocks are quick to fall when a bubble bursts: Investors are less concerned about the possibilities of market corrections and their impact on well-established companies. But a couple of decades ago, buyers of Internet start-ups made far more profit than investors who stuck with these well-established companies. The same thing happened when many investors bought low-quality resource stocks in 2007 and 2008, and it has happened in the past in penny stock bubbles. When the bubble bursts, however, prices of low-quality stocks inevitably come crashing down.
2. 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.

Use our three-part Successful Investor approach to make better investments, including those involving good Canadian penny stocks

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

What industries do you focus on for penny stock investing?

Where do you look to find good Canadian penny stocks?