There are two types of companies listed amongst the penny stocks. One is the start ups which are looking to raise capital from a share issue and the other is from companies in some kind of distress – usually financial. Since companies that are dying are rarely worth investing in, we’ll look at 3 things to look for in new start up companies that have the potential to grow big.

Commercialization

CommercializationThis is the most common type of penny stock. Small companies will spend years researching and developing a product that will literally turn the market on its head. When the product is released the share price can increase substantially if it gets media coverage or a positive response from the market. Finding a company that is developing a viable product for the market is the key. A company looking to develop a home fusion system or a flying car is not likely to be making any profits any time soon! By contrast Zagg designed and developed highly desirable protective coverings for Apples range of iPhones and iPods and their shares jumped over 825%.

Take Over Candidates

take over candidatesCompanies that are prime candidates to be taken over are ones with a tight synergy with a larger company. A good example of this is the beverage giants Coca Cola and PepsiCo who used 3rd party companies to supply all their drink bottles and in an effort to reduce costs, both companies looked in to taking over their bottle suppliers. In one instance the Pepsi Bottling Group saw its shares jump over 94% on the announcement that PepsiCo was looking to buy its bottle suppliers – even though there wasn’t any indication that Pepsi Bottling Group would be one of the companies that would be targeted for a takeover. When a company takes over another company the price paid per share is significantly higher than the last closing price, which is why it can return very quick profits in a short space of time.

Legal Fights

legal fightsOften companies are tied up in the courts trying to fight their corner over patent or copyright infringement allegations. In the hi-tech industry these litigations can go on for years, as was the case with Tivo who saw their stock reduced to penny share status when legal challenges were mounted against them. However, after 5 years they were successful in getting all complaints dismissed and the share price shot up to over $11, making the investors, who understood the intricacies of the legal battle, a tidy profit.

License Applications

License ApplicationsThis is more for the oil and mining industries who require licenses from Governments to conduct their business. A company who wins a license to explore for oil can expect their share price to rise substantially, for example Rockhopper saw their price rise nearly 1,000% on the news that they were to start exploring for oil in the Falklands Islands – and there wasnt even a guarantee they would strike oil!