Common Attributes of the Best Penny Stocks To Buy In Any Given Market

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Finding good penny stocks is not 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! 🙂  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.

Sound Business Model – There’s all sorts of companies out there and most of them love tooting their own horn, often sending out press release after press release in an attempt to get attention from both the traders and investors.  Now some of these stocks may sound very tempting to buy but if the business model behind the company doesn’t make sense to you, don’t buy their stock. Simple as that.  There are so many good micro-cap stocks out there with huge potential so why trade something you either don’t understand or don’t believe in?

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.

Actively Promoted – This is one is especially significant to day traders and short term traders.  Essentially, if a stock with a small float (i.e. very few outstanding shares) is being actively promoted by various IR companies, penny stock newsletters, paid pumpers and the like, the stock is very likely to appreciate in value, at least during the promotion.  A typical promotion can last a day, a few days, or even several months.  Like the other indicators, this one shouldn’t be used in isolation when finding good penny stocks to trade and timing a stock promotion can be very risky.  That being said, this one factor should not be underestimated as it can have a huge impact on a microcap.

These indicators will go a long way in helping you find the very best penny stocks with the highest growth potential.  Here’s to your financial success.

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6 comments ↓

#1 Scott on 11.03.10 at 4:32 am

You wrote: “When company insiders are buying their own company’s stock, it’s a very positive indicator” -how do u know if the co is buying their own stock?

#2 Anonymous on 11.04.10 at 10:23 pm

Hi Scott,

All insider transactions must be reported to the SEC. Many online stock brokerages allow you to view these transactions however you can also see them by going to a site like Yahoo Finance, and when viewing a particular stock click on “Insider Transactions”.

David

#3 Dennis on 11.09.10 at 11:45 pm

…or it could also be a pump and dump scheme which is very common of penny stocks

#4 Mark Gimenez on 01.24.11 at 4:13 am

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.

How can I tell or read that the stock is having a strong price gain with heavy transactional volume? Where does it say that on the website such as google/finance ? Is it true that if the Asian Markets decline such as Hang Seng, DOW the TSX follows the same suit?

#5 Anonymous on 01.25.11 at 12:28 am

Hi Mark,

As they say a picture is worth a thousand words 🙂 – I like to look at the stock chart where you can very easily tell if the stock is having up days with higher than average volume. As for your question on the Asian markets, my answer for this is yes the world markets can definitely influence one another but I would definitely not say it’s a hard and fast rule as there are just so many other variables at play. If the stock markets were that easy to gauge, we’d all be super rich =)

David

#6 Best Penny Stocks on 05.25.11 at 7:46 pm

I also like to check to see if the company has a patent on their product which better secures them from competitors.

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