It is difficult to truly understand how to pick winning penny stocks because winners are uncommon. However, we do have seven tips for making the best picks
Penny stocks can be riskier than other investments. Investors wondering about how to pick winning penny stocks and looking to add to the aggressive portion of their portfolios may turn to the higher-risk strategy of buying speculative penny stocks. However, there are several potential risks when investors venture into penny 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.
Are Penny Stocks Worth It?
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How to pick winning penny stocks: Fluctuations are part of the game
The price of penny stocks will rise and fall regularly.
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 precipitously.
How to pick winning penny stocks: What to avoid
Low-quality penny stocks
Low-quality penny stocks are quick to fall when a bubble bursts.
A decade or so ago, buyers of Internet startups made far more profit than investors who stuck with 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. And when the bubble inevitably bursts, prices of low-quality stocks come crashing down.
Exaggerated claims
Penny stock promoters love to make ‘deals’ with major, household-name companies. They’re sure the public is far more likely to buy penny stocks that have agreements with large well-established clients.
However, when promoters manage to make a deal with a major firm, they often go to great lengths to make it seem bigger than it is.
Above all, remember that big companies have far more bargaining power than individual investors.
A big company doesn’t go into a situation like this the same way you do, and will always reserve the right to drop out and cut its losses. In most cases, it will exercise that right.
How to pick winning penny stocks: 7 steps to follow
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. Below are 7 tips that you can used when investing in penny stocks if you want to diversify your portfolio and avoid the biggest risks.
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.
Look for well-financed companies: To profit in penny stocks, look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
Look for strong management: Look for an experienced management team with a proven ability to develop and finance a mine, product or service.
Look for a strong balance sheet: High-quality penny stocks should have strong balance sheets with low debt. It’s even better if they have a major partner who can finance the penny stock’s product to market or mine into production.
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 stocks trading on an exchange: We think you should avoid stocks trading “over-the-counter”, where such things as regulatory reporting are lax. Stick to penny stocks trading in regulated exchanges like the Toronto and New York stock exchanges.
Look past the hype: We also recommend avoiding stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
How to pick winning penny stocks and keep your money: Use our sell-half rule
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 likelier you are to lose.
That’s also why we think you should apply our sell-half rule.
Selling half your holdings after you double your earnings 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.
What are your thoughts on the notion that penny stock controversies mainly come from the promoters that mislead investors?
What is the most important lesson you’ve learned from investing in penny stocks?
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