A Few Helpful Tips For Finding Profitable Penny Stocks

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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.

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Choosing Where to Buy Penny Stocks Depends on Your Trading Experience

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 actually 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 financial industry.

The Risks and Rewards of Pink Sheets Penny Stocks

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.

How To Buy Penny Stocks Using a Discount or Full Service Brokerage

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.

Full Service Brokerage

Using a full service brokerage will mean dealing with a real live 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.

Discount Brokerage

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 purchase penny stocks is one thing but knowing what 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.