How to Find a Good Penny Stock to Buy

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Investing in the stock market can be really intimidating, but, thankfully, penny stocks offer the potential to play the market and win with little capital investment. For those still puzzled by what penny stocks are exactly, they are defined as stocks under 5; their low price allows investors to buy many shares at a low price in hopes of selling them once the value increases. If you have concluded that the penny stocks market is intriguing, the first step since to find potential penny stock investments. The key here is research, research, and more research. Timing is of the utmost importance when buying penny stocks, so, the more research you do on which stocks to watch will help you get the timing right.

Taking the time to research penny stocks and gather specific information on individual companies will significantly increase your odds of success.

Taking the word of the hot shot who owns a BMW in your neighborhood does not count as reputable research. Trust statistics, data, expert analysis and stock value histories as reputable sources of information.

There are many websites offering lists of excellent penny stocks investments, but, you still need to do your own independent research on every stock. Unfortunately, scammers are abundant, so, you need to learn how to be able to differentiate between legitimate penny stocks and pump and dump schemes. Finding a website that lists penny stocks is just the start; much like a good sales lead, there is still a lot of prep work to do.

Wall Street Survivor’s Investing Ideas page lists various penny stocks as does MSN’s Stock Screener which even allows you to filter stocks based on desired criteria like price per share. Once you’ve made a list of stocks to watch, you can research each one independently using a fundamental analysis approach or a technical analysis approach, the latter being more common for those buying penny stocks.

Be skeptical of “hot penny stocks” ads (they’re likely scams).

Stock market scams are common internet frauds. The pump and dump scam was even featured as a plot line in an early season of the mafia drama The Sopranos. Through research and observation, one can learn to spot these scams and avoid potentially significant losses. Some tips for fostering your money savvy sleuth are listed as follows:

#1: Consider the penny stocks ad a scam until proven otherwise. Unlike our legal system, you should assume guilty til proven innocent and treat any hot penny stocks as potential scams. When you come across a penny stock recommendation (or any stock actually), look for the source informing the report. Should the advice be sourced from insiders of the company or paid promoters, they stand to profit from your trade and therefore can not offer impartial “wisdom.” The first rule in research is, after all, consider the source!

#2: Investigate the companies behind penny stocks. Truly smart investors know that the underlying company behind a penny stock (or any stock) is a key component to market values. Carefully read a company’s financial statements, its prospectus and any other official information to give you a full picture of the company and its performance. Several very successful companies such as True Religion Jeans were once penny stocks that yielded huge profits for investors in part because the underlying business was a strong competitor in its industry.

#3: Pay attention to the right exchanges when buying penny stocks. Some penny stocks may be found on the major exchanges such as the Nasdaq and NYSE. But, more often than not, stocks under 5 simply do not meet the listing requirements of these major exchanges. Instead, find penny stocks to buy on over-the-counter bulletin boards and pink sheets. Do keep in mid, however, that these exchanges generally involve increased risk and exposure to price manipulation.

#4: Verify any and all hot penny stocks claims. Penny stocks promoters often tout extraordinary claims that the company is about to release the next big drug pending FDA approval, per the scam seen on the aforementioned Sopranos episode, or has access to a gold mine that once excavated will increase the company’s earnings exponentially. As with any sales pitch, claims are the bait to get you to buy, so, you can’t trust them as facts. Instead, look for supplemental information backing these claims from legitimate sources.

Top Tip for Stocks Under 5

Always be skeptical of penny stocks!!  This entire article can be summarized down to this one tip. As your mom probably told you, and her mom before her, and so forth: if it sounds too good to be true, it almost certainly is.

How to research stocks under 5

Find the industries trending by consulting Investors Business Daily rather than relying on water cooler gossip. Turn to the Market Section page, locate the “Strongest Industries” section, and select those industries with the highest Relative Strength Index (RSI). The RSI measures the strength of a trend; the higher the RSI, the stronger the trend.

Use a free online penny stock screener such as Zacks Investment Research Stock Screener. Select OTC as the exchange and then find the Industry heading; using the drop-down menu, highlight the industries of interest to you. Penny stocks have low market capitalizations (market cap), so use a market cap range of $100 million to $300 million to help sort. Because penny stocks are often thinly traded, closing a trade can be difficult, so, use 100,000 as the minimum average volume amount.

Penny stocks trading at less than $0.009 a share can be easily manipulated; use a price range from 5 cents to $2 to avoid problems.

Enter positive growth and sales qualifiers to select profitable companies.

To research each company, use an online financial data provider like Yahoo Finance and pull up each company’s financial statements. Avoid any company swimming in debt. Now pull up a stock chart to verify if the company is in an up-trend. By screening each stock using the above criteria, you will find the best penny stocks for your investment.

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