Also known as micro cap stocks, penny stocks are stocks that are selling at prices lower than a dollar. They are very popular among investors who wish to find the next Walmart or Apple Computer. Many of the penny stocks are less likely to see serious future growth because these stocks trading below a dollar representing that the companies are underfunded, poorly managed or even on the edge of bankruptcy. However, by doing your homework with a few rules and tips, you can still find some gems in this market and make a profit.
1. Keep exposure low.
It is known that penny stocks are very risky, so it is important for traders to only risk a small portion of their overall portfolio in this market. Consider penny stock investment like purchasing a lottery ticket. You will spend $10 for the lottery ticket and it can give you a chance to win, but it is foolish to invest with your life savings.
2. Focus on the long run.
It is difficult to make profits from penny stock trading. They sometimes trade on the over-the-counter market, which might be unregulated and leaves them prone to manipulate the market, which eventually result in trading losses. The Motley Fool suggests that once you have done your research and found a sound company with potential in future growth, you should hold it for at least 3 years to give the company an opportunity to prove itself.
3. Look at the management.
Penny stocks are also known as micro cap stocks and this denotes that penny stocks are companies in underfunded status. If the current funding of a company is low, it requires a strong management team to develop the growth potential for the company. Before you make you decision on which penny stock to buy, you need to take some time and do your research on the management team. You should look for managers that hold good track records and companies that regularly report earnings because late earning reports normally means unfocused management.
4. Do reverse engineering.
If you would like to find the next Walmart, you can go back and look through its development history, especially for the early traits. For an example, Walmart started to pay a dividend just several years after it became a publicly-traded company. Also, it began to pay dividends right in the middle of bear-market conditions. It was also a company that didn’t take serious management in the early stages. You will be able to get some idea about an unfamiliar company if you can find similar traits of companies that have grown into leading companies in the same industry.
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