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

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.