Learn the characteristics of top penny stocks today to ensure that you are making the most informed decisions with your investing dollars

Investors looking to add to the aggressive portion of their portfolios may turn to the higher-risk strategy of buying speculative Canadian penny stocks. However, if you’re an investor seeking financial security we can assure you that penny stock investing is a risky way to do it.

There are several potential risks when investors hunt for the top penny stocks today—so it’s important to ask key questions before investing in penny stocks.

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Be wary of some of the top penny stocks today and you could avoid buying into a scam

Penny stocks can be more easily manipulated than most stocks because of thin trading and price volatility.

You should also 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, newsletters and paid sponsorships.

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 tenuous 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.

As part of that, when penny stock promoters get a deal with a major, they 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 or other new concept is still in the early stages of development, it’s often a good time to sell.

Limit the percentage of your portfolio dedicated to penny stocks so your portfolio will grow no matter what happens with those shares

Ultimately, penny stocks should always be a small part of any diversified portfolio. The most speculative of them should also be bought with money you’re willing to lose.

For the bulk of your portfolio, you can put the odds in your favour by following our three simple rules: Invest mainly in well-established, mostly dividend-paying companies, spread your money across most if not all of the five main economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities), and avoid or downplay stocks in the broker/media limelight.

Unlike with penny stocks, this puts time in your favour. The longer you stay invested in high-quality stocks, the more likely you are to come out ahead.

The longer you hold on to what you think are top penny stocks today, the riskier they can get

If you lose money in speculative penny 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 more likely you are 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 also suffer from large price fluctuations, so any bit of news will cause a penny stock’s price to rise or fall.

Here are some criteria investors can use to assess the top penny stocks today

“Investment quality” is not a term you hear often with penny stocks. There are, however, ways to distinguish those few stocks of better quality when seeking to invest in this high-risk area. Here are some general ways you can cut your risk:

1. Look for well-financed companies with no immediate need to sell shares at low prices because selling would dilute existing investors’ interests.
2. Seek companies with a strong balance sheet and low debt. It’s even better if there is a major partner who is financing the mine, product or production to commercialization.
3. Find companies with experienced management teams with the proven ability to develop the mine, product or service.
4. Compare the market cap of the stock with the estimated future value of their assets or earnings stream. Sometimes, companies need to secure money to quickly find a mine or launch a project to both justify their current share price and to avoid a collapse.

Use our three-part Successful Investor approach to make better investment decisions—including if you aim to add the top penny stocks today to your holdings

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

We think most investors would do well to stay away from penny stocks. What success have you had with a penny stock? How long did you hold it?