We all want to be profitable, successful investors. But many investors never learn how to pick penny stocks because they’re often seen as risky, speculative investments. On the flipside, some investors recklessly target penny stocks because they believe a big payday is possible. The fact is, penny stock investors can indeed get lucky and experience high profitability over a short period. This type of result is rare, though, and many investors in penny stocks end up losing their investment.
Which leads us to the question of how to pick penny stocks successfully. The most important rule is that if you plan to add penny stocks to your portfolio, only do so with an amount of money that you feel comfortable losing. Penny stocks should mainly be a target for aggressive investors who understand the risk.
Knowing how to pick penny stocks begins with understanding the challenges
There are a few reasons that penny stocks are speculative and risky. Penny stocks are often new ventures, so there is no proof behind their viability as companies. Is the company’s management experienced or skilled enough to succeed? It’s an important consideration to make before buying any penny stocks.
Furthermore, many penny stocks are nothing more than marketing ploys. Promoters of penny stocks may exaggerate claims regarding the stock itself. This can involve the claims of partnerships with bigger companies. These claims can help persuade investors to buy because they believe that the connection with the major brands will help lead to the penny stock’s growth. This is not always the case, though, and some of the more prominent companies that do partner with penny stock companies may end up cutting their ties with the penny company if the stock falters.
Penny stocks also experience fluctuations easily, because the liquidity of penny stocks is much lower than other more established stocks. The lack of liquidity makes it hard to sell penny stocks once you purchase them.
Look for specific characteristics when learning how to pick penny stocks
If you’re planning on investing in penny stocks, it is best to look for ones that may lead to profits. Although always speculative, there are some ways you can select penny stocks with a greater chance of making money.
The first recommendation is to look beyond the hype. Don’t fall for a sales pitch or an unfounded stock promotion. Instead, look for penny stocks from a company with a marketable product or service. Find penny stock companies that have strong management, ideally with a history of success. You’ll also want to ensure that the penny stock company has enough financial backing to succeed. Experienced management will help in this process.
Another factor to consider is the company’s current balance sheet. It’s particularly helpful to find companies that have low amounts of debt.
Follow these guidelines on how to pick penny stocks, and you will be in a better position. Remember, even though penny stocks are speculative ventures, they still can make up a small part of a conservative portfolio. Or they can be a bigger part of an aggressive portfolio. Select wisely and make sure you understand the possible downfalls of penny stock investing.
What types of industries do you look to invest in when considering penny stocks for your portfolio?