How to Research Penny Stocks

There are thousands of penny stocks listed on OTC Bulletin Board and Pink Sheets, but no very good way to screen them other than sifting through lots of listings — unless you subscribe to a penny stock research service. Penny stock prices are often manipulated by market makers or pump-and-dump schemes. It is possible, however, to get phenomenal returns from penny stock trading.

Note that there are many definitions of penny stocks. Some consider any stock trading below $5 to be a penny stock. Most investors, however, search for stocks trading under a dollar when they are intent on buying a penny stock. Yet others only consider stocks that are traded on OTC exchanges as penny stocks.

Find penny stocks worth researching. Use a stock screener to quickly find those stocks priced at less than $1 a share. Check OTC BB and Pink Sheets websites for thousands of penny stock listings. Search for companies by sector. For instance, if you think that alternative energy is becoming hot, look for green energy penny stocks. Those start-ups might soar when they get government contracts.

When you know company name or symbol, you can find price charts and other data on sites like Google Finance or Yahoo Finance or others that offer free financial data. Look at volume: at least a few million shares traded daily and small bid/ask spread. Examine the balance sheet for the company's amount of cash. Weigh the net profit margin. A very low profit margin might mean that the company will soon be losing money.

Be very careful when buying penny stocks you find listed on so called hot penny stock lists. Check the price chart. If a stock went up dramatically over the last few days, chances are, it will go down very soon. Very frequently, a hot penny stock list is nothing more than a pump-and-dump scheme. Penny stock lists found on MSN Money are usually based on legitimate stock analysis, but their price may have gone up precisely because they were on that list, and will go down soon when investors take their profits. If the company does indeed have sound fundamentals, watch its stock for a few weeks and buy it when the price goes down a bit. You may cash in when it posts good news later on.

Before you invest in a penny stock, try to learn more about the company: the products it makes, the people that lead the company, etc. Visit the website. Call the investor relations contact numbers and ask questions. If you don't believe in the products the company makes, you might not want to buy the stock either.

Finally, remember that no matter how much research you do, penny stocks are still very risky investments. Do not invest money that you can't afford to lose. Generally, the suggestion is to not invest more than 20 percent of your entire stock portfolio in penny stocks.


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