Good Penny Stocks and Hot Penny Stock Picks
Firstly, What is a Penny Stock? Stocks termed as penny stocks are not necessarily stocks which trade for a penny. In fact normally penny stocks are termed as stocks that trade for under five dollars. Stocks that trade from a penny downwards are generally termed as sub-penny stocks.
Trading penny stocks can be extremely risky when you do not know what you are doing, even more so than trading normal stocks because they can be much more volatile when markets move. For example, a simple press release can cause penny stocks to suddenly change price. This can be very dangerous since there can be occasions where a stock price rises which may be only due to a number of speculators purchasing on the back of information circulated across bulletin boards, causing a sharp price rise. Seeing the price rise, other investors jump in and buy more, causing the prices to rise higher and then suddenly, the original purchasers sell causing the price to reverse. If you purchase during these times, you may find yourself holding shares that are worth far less than you purchased them, within a very short period of time.
There are several markets in which you can trade penny stocks. In the United States, these shares can be traded on the pink sheet markets or on the over the counter (OTC) bulletin market. In Canada there is the TSE and TSE Venture Exchanges that are used to trade penny stocks. A far safer way to trade penny stocks is to use either the NASDAQ small cap market or the American Stock Exchange (AMEX). Using either of these, although still risky, are far safer since the companies trading have to file financial reports that you can look at prior to purchasing stocks. However, the downside of trading stocks through these is that the stocks traded have a minimum requirement of a value of one dollar. Pink sheet stocks do not require and company reports to be filed and often you cannot even find out the share structure so by nature can be extremely risky.
So how do you know a good penny stock?
A good penny stock would generally be one that meets the following criteria.
1. The share price is less than 5 dollars.
2. There is a Profit Margin of greater than one percent.
3. The company in question has more cash then debt.
4. The future projections for the company look realistic and achievable.
5. The shares are traded on either NASDAQ or AMEX.
With just a small amount of research, following the above criteria, it is possible to find good penny stocks.
There is no best or worst company in which to buy penny stocks, whether you profit or not normally depends on your ability to buy and sell at the right time. For example, you could buy what seems a really bad company, however, their price goes up due to a press release so you make money.
Another very important factor in trading penny stocks is to set yourself some strict money management rules. If you buy stocks and they move in the wrong direction, sell them once they reach x percentage loss. Or, if they are making a profit, sell when they reach x percentage profit. Do not set your profit goal too far away as often the price change can reverse at any moment and end up in you losing. Conversely, set your stop far enough away to allow for market movement. By setting a stop too close, you will find that as the market normally moves, you will end up making a loss more often than winning.
In summary, trading good penny stocks is purely speculation and relies on you being able to trade without any emotion and following the rules you set yourself religiously. Also remember that all of the good penny stocks are generally traded either on NASDAQ or AMEX and you can find reports about them on services such as Reuters.
Having created a penny stock website I’m always answering email asking… “How To Invest"
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