How to Pick Winning Penny Stocks 5.00 / 5 (100.00%) 1 vote

Penny stocks are often referred to as the slot machines of the equity market. This is because there is very low risk involved when buying penny stocks. Most penny stocks cost below $5 a share, and have market caps of under $200 million. As long as you know how to pick winning penny stocks, they can be an asset to your portfolio.

Do Not Invest More Than You Can Afford

Penny stocks have low risk, as long as they are traded wisely. Before choosing penny stocks, it is a good idea to set aside savings for at least three months. This will ensure that you are covered in case the investment does not work out.

It is important to understand that penny stocks can be a dangerous investment. Most companies selling these stocks usually have no track record of financial performance. Also, the stock can be manipulated by scam artists.

Gain Experience First

Before getting into penny stocks, you should get about a years worth of experience with mid and large cap stocks. You can take this time to learn how to read balance sheets, cash flow statements, and income statements.

How to Pick Winning Penny Stocks

Learn the Aspects of Penny Stocks

It is important to understand that certain aspects of penny stocks can make them lucrative or dangerous to your portfolio. It is important to understand the mechanics behind the money flow. You should also understand market capitalization and share structure. You should also understand the purpose of public companies, and how common scams are. Also, learn about the loss of investment and dilution associated with penny stocks.

Identify Which Stocks You Should Immediately Reject

There are certain stocks that you should reject right away, without doing much research on the company. You should reject a penny stock if:

• The stock is not traded on one of the major US exchanges
• Companies which have less than $10 million dollars in revenue yearaly
• Companies that you heard about via email
• Companies in industries which you do not understand or like

Identify Red Flags

Certain companies will raise red flags. You should look for companies with attributes of running a scam. Also, avoid companies that are operating solely for the reason of raising money through stock dilution.

Avoid Companies with Heavy Debt

It is a good idea to avoid companies with a heavy debt load, and look for companies who have generated cash consistently and are growing their free cash flow.

Know How to Look For Prices

Rather than looking at the price of the share, you should compare the price of the share with the book value per share.

Limit Your Penny Stocks

It is important to limit your penny stocks to no more than 5% of your portfolio.

Do Your Research

In order to successfully trade penny stocks, you should consider getting investment management software to help you out. With this software, you can track your profit and loss. Also, you can keep track of the cost of stocks, fund prices, company news, and technical analysis.

Taking courses in accounting can be very beneficial when trading penny stocks. You do not need to become an accountant; however, you should be able to understand basic accounting principles, reading and preparing annual reports and stock market history.

Taking a course in money management is also a good idea. When you understand asset allocation, you will not worry about one stock wiping out your entire portfolio.

As long as you know how to pick winning penny stocks, they can be very beneficial to the health of your portfolio.