Common convention says that penny stocks are stocks which cost less than $5 per share. Unsurprisingly, given the lucrative rewards investing in penny stocks can bring and the ease at which you can buy them, they are now more popular than ever, but only a small
percentage of traders are really making a killing trading these unpredictable stocks.
Penny Stocks Are Either Companies With a Negligible Income Or Are Financially Distressed
Penny stocks are either companies that have negligible income or are financially distressed companies which are in the dying stages unless an institutional investor can be found to take them over. Given the high amount of uncertainty surrounding these shares, it is vitally important that you know how to go about researching and investing in the hot penny stocks.
Research The Company Background
Naturally, the first thing you should do when you’ve come across a good penny stock is to find out as much as you can about the company. Ideally, you should have a good idea of the industry it is operating in such as whether its a growing, stagnated or declining sector and who the competition is. Finding out about any company in this day and age is an absolute breeze with the Internet. You can find out who runs the company, do profile checks on all the directors, look up patents, research the competition and refer to industry blogs to get a feel for the market demand. You might even be able to connect directly with the owners via LinkedIn or Facebook.
If you cant find any information on the company or people that run it then it should start sounding alarmed bells. Similarly, if a company is waiting on some legislation like a mining license or patent agreement and there is no way to find the status of this then its a very high-risk penny stock.
Have A Look At Online Forums And Blogs
Secondly, you should find out what the chatter is in the online forums and blogs. Are other people discussing the penny stock? What are they saying about it? A penny stock which no one is discussing is a bad sign but at the same time, a penny stock which everyone is talking and getting excited about could also be a warning sign as its being ramped up by the retail investors and the share price could be higher than its actually worth. Small stock bubbles can easily be created in the penny stocks market where volumes and prices are low.
Look For A Penny Stock Broker
Thirdly, you should look for a broker that is specialized in the business of buying and selling penny stocks. Many offline and even some online penny stock brokers won’t let you trade certain shares over the counter, while others will charge a hefty fee for letting you do so. Some brokers like E*Trade tend to do a good job of letting investors trade obscure penny stocks but take in to account the commission fees can eat into your profits when you come to sell the shares.
Finally, you need to understand how many penny stocks are actually traded. Most of them are not listed in a major exchange like the NASDAQ or DOWJONES and are traded over the counter. This means that the companies often don’t have the same financial reporting and ownership disclosure that companies listed on the major exchanges have. It also makes it harder to buy and sell as the market has a low volatility. Even if the penny stock goes up, there …