What is a Penny Stock?

What is a Penny Stock Investing?

While penny stock investing may be cheap, it can also be some of the most volatile investing on the market. Even though they can also be a good way for an investor to learn their way around the stock market, there are certain steps one needs to follow to be successful when buying penny stocks.

First, investors must understand the differences between penny stocks and regular stocks. Unlike regular stocks, the penny variety is not traded on the regular stock exchange, but rather over the counter or in the OTC market. Investors will need to locate an OTC market in order to beginning trading. One good example of this type of marketplace is the NASDAQ National Market. It is also recommended to consult a broker when looking at investing in penny stocks. Many times they won’t help you with the orders because the profit is too small, but they can give you advice. Also, keep in mind you will have to buy thousands of shares at a time in order to make a considerable profit.

When looking to invest in penny stocks, it is important to understand why these stocks are so volatile. First, the companies you are investing in have little to no track record. Because of this, penny stocks are the most likely of any type to lose value. However, they are as equally likely to double or triple in value.
Before investing in penny stocks, it is important that you become experienced in dealing with typical stocks such as mid and large cap stocks first. This will teach you how to read such things as balance sheets, income statements and cash flow statements. All of this information will help you understand the stock market and be able to tell legitimate penny stocks from those which are nothing more than scams.

Now that you have the background knowledge into how companies operate and how to read their financial forms, you are ready to invest in penny stocks. In order to make the most money possible and limit your loses, there are still guidelines to follow.

1. Know which stocks to reject right from the beginning. These stocks are identified as those not traded on any of the major U.S. exchanges. Look for companies with several million in revenues and avoid any email regarding a penny stock that tells you it is a must buy. These emails are generally nothing more than scams and come from promoters.

2. Do look for companies that have consistent cash flow and are growing their free cash flow over a period of time.

3. Us your new skills in reading financial documents to avoid any company with a heavy debt load.

4. Instead of looking at the actual price of the share, compare price per share against the book value per share. These are the assets minus the liabilities.

5. Only purchase stocks from companies which are at a very low multiple on their cash flow.

6. When investing in penny stocks, don’t make them your entire portfolio. Ideally, penny stocks should make up no more than 5% of your total investments.

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