Successful penny stock strategies often focus on technical analysis as a way to buy profitable penny stocks with maximum returns. However, I believe the fundamentals of a company are equally important in order to help minimize risk and increase the odds of scoring a high yielding penny stock.
Stereotypically speaking, penny stocks are companies just starting up and in need of capital. They are indeed very risky in nature but if the chosen company is successful, they can provide a huge return on investment. But how do you identify a good company with great potential? Here are some factors to consider:
Innovative Ideas and Competent Management
Finding companies that will take off is not an exact science. It requires significant research and a little bit of luck. However if you know what to look for, you can dramatically increase your chances of picking the right stocks.
A successful company needs something that sets it apart; a way of delivering a known product more effectively, a new product, or even a whole new concept. It is up to you to scout out the companies and judge for yourself if their ideas hold water.
Secondly, a company starting up needs competent management. A company with a great idea can easily fail if thoroughly mismanaged. Judging whether the people behind a company are talented can be extremely difficult but look at what experience they have, if they seem trustworthy, and whether they are passionate about what they are doing. Also, see whether they actually hold stock (insider buying). If they hold stocks, chances are they truly believe in the company and its future.
Healthy Balance Sheet
Probably the most important factor to consider when making profitable penny stock picks is does the company have a healthy balance sheet? Do they have significant debt and are they turning a profit? What is their cash burn and how much cash do they have on-hand? These are the types of questions you need to answer before even considering to buy penny stocks of a particular company.
Diversify Your Portfolio
No matter how well you pick your penny stocks, you will still be making very risky investments. To reduce the risk you need to diversify. Ideally, you want to invest in other, more secure assets, such as bonds, ETFs, or stocks of established companies like blue chip stocks. If you only invest in penny stocks (not advisable), you especially need to pick multiple companies. Remember, you want to buy profitable penny stocks, as in more than one; never put all your eggs in one basket.
It shouldn’t come as a surprise that penny stock investing is not for the faint of heart. However, implementing some of the core concepts discussed will increase your chances of a profitable outcome.
One of the first questions you may have is how to buy penny stocks. Before we get there though, you should first understand a little about what penny stocks are.
Penny stocks, also known as nano stocks, dollar stocks, and micro cap stocks are by definition any stock trading below $5 per share. As such, penny stocks do not typically trade on major stock markets like the National Association of Securities Dealers (NASDAQ) or the New York Stock Exchange (NYSE), unless of course the stock temporarily dips below $5. Instead, you will find penny stocks listed on the over-the-counter (OTC) and the Pink Sheets markets. Unlike the OTC however, the companies listed on the Pink Sheets market do not need to file current financial reports with the Securities and Exchange Commission (SEC).
So, how to buy penny stocks? Well, similarly to buying other types of stocks, your main two options for buying penny stocks are via a full service brokerage or using a Discount Brokerage account.
Using a full service brokerage will mean dealing with a penny stock broker. You give your broker (usually done over the phone) the number of shares you wish to buy, the maximum price you wish to pay, and the ticker symbol of the stock. The stock broker would then attempt to purchase these stocks on your behalf. The stock broker gets payed either through a commission per transaction or more commonly through principle transactions, meaning they would make money on the difference between the bid price and ask price, known as the spread. The main advantage to using a full service brokerage account is that your stock broker can typically give you investing advice as well as facilitating the trades for you. The main disadvantage however, is these services are typically expensive. If you decide on a stock broker, be sure to find one that is reputable and trustworthy with a solid track record.
Alternatively, you may create an account with a Discount Brokerage firm. Once you’ve created an account, you can make trades online and with relatively little effort. The main advantage with a discount brokerage account is that it’s much cheaper than using a full service brokerage but you need to know what your doing so it’s not advised for novice investors. Also, for very thinly traded penny stocks, you may simply not be able to execute your desired trades for the price you want without the use of a stock broker who has more resources at hand.
Knowing how to buy penny stocks is one thing but knowing the best penny stocks to buy and when to sell them is another. Remember, trading penny stocks has a very high risk attached to it. Yes the rewards can also be great, but you need to know what you’re doing so whatever you do, don’t just go off and start buying random penny stocks hoping they’ll appreciate in value. Get educated first.
There are essentially three different options when choosing where to buy penny stocks: A discount brokerage firm, a full service brokerage firm, and a money manager or investment advisor.
Discount Brokerage
A lot of people just go with a discount brokerage firm because it’s cheaper. I believe this is fine for seasoned investors but not if your new to stock trading, especially penny stock trading, due to its highly volatile nature. There are many good discount brokerage firms and pretty much all of them are accessible online. A discount brokerage account will allow you to buy and sell stocks online at the click of a button. They normally will charge you a set commission per transaction though many will lower the commission if you are a high volume trader. Some good discount brokerage companies include Interactive Brokers , TD Ameritrade, E*Trade, and Charles Schwab. Just make sure you compare the services offered and their fee schedules as depending on the type and quantity of trades you perform, one firm may be more cost effective than another.
Full Service Brokerage
Despite the growing popularity of discount brokerages, there are still a good number of investors who prefer full service brokerages when deciding where to buy penny stocks. Full service brokerages though typically more expensive, offer a much greater level of service for investors including general investment advice, executing trades on your behalf, and even recommendations on which stocks to buy and when to sell them. For investors with limited knowledge, particularly those who wish to buy penny stocks, a full service brokerage could be a good choice. Just be sure you go with a reputable company you find a stock broker you can trust and that has experience buying penny stocks. Some of the better full service brokerage houses include JPMorgan, AG Edwards, Merrill Lynch, Morgan Stanley, and UBS Financial Services.
Money Manager / Investment Advisor
Finally, for those who not want to even think about which trades to perform and when, you can find a Money Manager also known as an Investment Advisor. Though most people think of money managers as those who manage mutual funds, money managers can actual manage any type of investment. A money manager is someone who will manage your account, make trades based on their expertise, and keep you up-to-date on the progress of your account. Though some money manager are tied to brokerage houses there are still many who are completely independent. Now since our focus is with penny stocks, you will want to find one who has a proven track record trading them. Finally if you choose to have a money manager, it’s very important to find one you can trust and that has a strong reputation in the fininancial industry.
Knowing what are the best penny stocks to buy at any given time is not always easy to say the least. In fact there is no sure fire way to pick the right stocks at the right time all the time. If there were, we’d all be rich, but the truth is choosing the top penny stocks to buy is more of a best guess rather than a solid formula.
Having said that however, don’t let this deter you as there are a number of indicators you can factor in when looking for hot penny stocks which can significantly increase your rate of picking profitable penny stocks versus losing ones. You should never just use one indicator when picking stocks however. All indicators should be looked at together as a whole to more accurately analyze a penny stock’s potential. The following are some indicators to consider when penny stock investing:
Strong Price Movement – If a stock has large percentage price gains with heavy transactional volume over the course of a number of days, this could be an indicator that the stock is starting to trend up and build momentum.
ROE (Return On Equity) – ROE, often considered the most important ratio in stock analysis is essentially the quantity of net income returned as a percentage of shareholders equity (SE). It’s calculated by dividing the net income by shareholders equity. Penny stocks with a positive ROE no matter how small indicates the company has value and is turning a profit. In other words it’s a sign of quality.
Technical Analysis Indicators – Technical Analysis is a way to predict a stock’s future performance based on past performance. One of the most important indicators is the MACD (Moving Average Convergence / Divergence) ratio. The MACD ratio measures whether a stock is trending up or down. The idea is that if a stock is trending up it has a tendency to continue that trend until of course the trend starts to change (which the MACD can also indicate). The most common parameters used in the MACD ratio are (12,26,9). Another popular indicator are moving averages, particularly the 50 day and 200 day moving averages. It is believed that if the stock is above the 50 day, it’s a positive sign and if the 50 day is above the 200 day, even more so.
Insider Buying – When company insiders are buying their own company’s stock, it’s a very positive indicator. The reason is quite simple. They believe in their company and the future growth of the stock; why else would they be buying? And who knows the true financial condition of a company better than those running it? Enough said.
These indicators will go a long way in helping you find the very best penny stocks to buy with the highest growth potential. Here’s to your financial success.
With an interest in buying penny stocks, you almost certainly would have heard the term “pink sheets” or just “pinks” at least once. The term “pink sheets” actually comes from the color of paper the stock quotes were originally printed on but now it refers to the electronic quotation system used for a variety of OTC securities.
Pink sheets penny stocks are essentially stocks with a price below $5.00 that trade on the Pink Sheets electronic quotation service. But what exactly is the pink sheets and how does it differ from the OTCBB and major markets like the NASDAQ and NYSE?
An important point to note about the pink sheets is that it is not a registered stock exchange but a computerized quotation system and the stocks that are listed on the pink sheets are generally stocks that could not meet the specific requirements of a major stock exchange. Furthermore, unlike stock exchanges the pink sheets are not regulated by the Securities and Exchange Commission (SEC). As such there are virtually no requirements for historical or even current financial data though companies issuing stock on the Pink Sheets are at least bound by both federal and state security laws.
Obviously due to the lack of regulation, the pink sheets can be a dangerous place to buy penny stocks. Therefore, you really need to perform your due diligence on any potential company your interested buying stock in. Companies can vanish with out a trace from the pink sheets along with your hard earned cash. Due to these factors in addition to the extreme volatility and unpredictability of pink sheets penny stocks, it’s highly recommended that an investor stick to trading with money he can afford to lose and no more than 10% of of his portfolio.
Having said all this, by exercising both caution and experience and by implementing specific stock strategies, a lot of money can be made in the pink sheets. Why? Simply, pink sheets stocks can double or triple in price very easily. A 5 cent share for example can quite easily become a 10 cent or 25 cent share in a matter of weeks, leaving a 100% or 400% gain respectfully. Seeing that the average stock goes up a measly 6% per year, it’s very easy to see the lure of penny stock investing.
Whether you decide to buy penny stocks on the pink sheets or on the OTCBB, by being very selective in the stocks you choose in addition to using various proven stock strategies to limit your risk, this portion of your overall portfolio can very easily become your most profitable one.
If you’re wanting to profit from penny stocks, you might want to look beyond the US borders (assuming that is where you live) and more specifically pay attention to Canada. A lot of investors who specialize in micro cap stocks love Canadian penny stocks and for good reason.
Canadian penny stocks and Canadian stocks in general have performed extremely well the past several years compared to the rest of the world. Canada, like the US is a very stable democratic country with low risk for political or economic instability. However, Canada is also extremely rich in natural resources including oil and precious metals which have all been skyrocketing in recent years along with the stocks related to these commodities. Canadian gold penny stocks and oil penny stocks in particular have done very well and made a lot of penny stock investors small penny stock fortunes!
With that said, how do you get your hands on Canadian penny stocks? In a nutshell, Canadian penny stocks can be found in five different markets: the pink sheets, OTCBB, the Toronto Stock Exchange, the TSX Venture Exchange, and to a lesser degree, the Montreal Exchange. The pink sheets and OTCBB are US markets and trade in USD. The other three are all Canadian stock markets and thus trade in Canadian currencies. The Toronto Stock Exchange is by far the largest and most reputable Canadian stock exchange with the strictest regulations. The Venture Exchange however is probably where you’ll find the most penny stocks and in particular, precious metal penny stocks.
Now that you know a bit about what markets Canadian penny stocks trade in, you really have two main options as far as how to actually buy them. The first option is to open a Canadian brokerage account whether it be a discount brokerage or full service brokerage. Some popular Canadian discount brokerage companies include Scotia itrade (formally E*trade Canada), Interactive Brokers, RBC Direct Investing, and CIBC Investor’s Edge. Full service brokerage firms include BMO Nesbitt Burns, RBC Dominion Securities, and Laurentian Bank Securities. The second option is to open a US brokerage account that allows trades in Canadian equities or to simply buy Canadian penny stocks via the pink sheets or OTCBB markets. The OTCBB especially often has the USD equivalent version of a Canadian penny stock that can be purchased in US funds.
No matter which option you choose, buying Canadian penny stocks is not difficult and the rewards can be great. Just make sure you always peform adequate penny stock analysis and research on each company just like you would before buying any stock investment.