Penny stocks are so called because they sell for as little as five dollars, and sometimes even for less than a cent. Penny stock lists are very easily available online, but they are definitely a risky form of investment.
Although penny stocks are considered to be highly volatile and people land up losing large amounts of money with them, there are genuine companies whose shares operate in the pink sheets and OTC at extremely low prices. If you are able to differentiate such a company from the list, then investment is definitely worth it. The investment will pay off as good returns in the formative years itself. Deciding on such a company requires 3 conditions to be fulfilled:
1. An Intense Study on the penny stock companies that will help you choose the authentic stock. For this one must be aware of what business the company is pursuing, the feasibility of the company’s business strategy, and whether it has the right management and capital to move ahead with its business plans.
A penny stock is worth investing if it has a net asset value per share that is greater than its own share price. Fulfilment of this condition will help the company wade through crisis times and will also help it raise greater funds.
2. The Money To Invest And Patience To Hold On to the penny stocks if you have hit upon the right company - Authentic and good companies will gradually appreciate in value. If you are a long term investor, then your investment in such growth companies will eventually pay off. However, you must also have the extra investment capital to bear the loss in case of a fraudulent transaction.
3. Luck - This is very important in the penny stock market where there is a lot of manipulation. If Lady Luck smiles on you, then your penny stock might grow up to a mammoth blue chip.
Manipulation of stock prices is widely prevalent in penny stock markets. In such cases, a broker who might assist you in evaluating the information on various penny stocks can be of great help. If it a new company, the IPO must be studied in great detail because it informs you a lot about the company, its capitalization, cash flow, management of the company and much more.
Stay Away From High Pressure Sales – Brokers may artificially inflate the penny stock prices in order to create a false demand. If they do so, once all stocks have been sold, the prices will automatically plummet.
Research Carefully On The Brokerage Firm That Specializes In Penny Stock - Avoid all companies that promise to give you insider information or acquire aggressive selling techniques. An authentic company will always make you aware of the inherent risks.
Research The Company From Which You Are Planning To Buy Penny Stocks –
Go for only those penny stock companies that have a good track record in their business, have genuine business strategies and deal in currently available products. A lot of fake companies make promises of unknown product launches and are nothing but a fraud.
Invest In A Penny Stock After Complete Knowledge About How Your Money Will Be Spent – One must be aware of which properties the company is investing into. After all it is your money. The company should also publish its financial reports.
Penny Stocks Must Be Only A Small Part Of Your Investment Portfolio - It is recommended that penny stocks must not take up more than 5%-7% of your total investment portfolio. And, one must be prepared to accept the losses in penny stocks. It is always better not to borrow and invest in these volatile stocks.
© 2008 Penny Stocks.