How to invest in Penny Stocks? Risks, Strategies

The Concept of a Penny Stock

A penny stock simply means a stock which is very cheap. The name penny stock makes it sound as if the stock price is around a penny. However this name should not be taken literally. Sometimes stocks priced up to $5 could also be called as penny stocks. Penny stocks are popular because the so called 'best penny stocks' rise several 100 times their original price. Many online brokers or penny stock brokers try to attract investors to invest in penny stocks by showing past examples of how penny stocks have given fantastic returns. However, although investing in penny stocks is a very interesting strategy, one needs to understand the risks involved and study the measures that can be taken to reduce this risk. Interested in learning more about penny stocks? Read this entire post to understand the risks, strategies and advantages of investing in such cheap stocks.

How to buy Penny stocks? Who are Penny Stock Brokers?

Penny StocksPenny stocks are bought in exactly the same way as any other stock. However not all penny stocks are listed on standard big stock market exchanges. For example, in United States penny stocks which don't make it to NASDAQ are listed on OTCCB. In India several penny stocks are listed on BSE but not on NSE. Thus to buy penny stocks you have to register with a broker who can help you carry out trades on stock market exchanges. Some brokers specialize in trading in Penny stocks.

How to spot Top or Best Penny Stocks?

Here comes the big question. How to spot penny stocks which multiply in value over time? Is it easy to find a top 10 list for penny stocks? This is a tricky question. Although it is easy to justify past examples, one can never be sure which exact penny stock is 'the best'. So if you are really interested in making a lot of money with penny stocks first prepare your mind by realizing that it is risky to stick to a top 10 list here. Now you can continue to read the real strategy in investing in such cheap stocks.

A simple rule of Investing

While invest in Penny stocks, you must follow one simple rule - invest in a lot of them. Chances are that 90 or more stocks out of 100 will actually fail. Remember penny stocks are high risk investment assets. So just picking best few and investing in them could wipe out your capital. The secret mantra here is 'diversification'. Even if 90 out of 100 fail, the remaining few will hopefully multiply so much in their value that it will be a massive net profit for you. But wait, invest in a lot of such cheap stocks does not mean you pick a random large list. Here is where you have to do some homework. Continue reading...

Penny stock picks

It is a good idea to fix one rule or filter in order to screen and pick penny your stocks for investment. For example, you can pick stocks which meet the following two criterion.
  1. Pick companies which produce something for which you can see there is a sustainable demand in the market.
  2. Pick companies which are not heavily ridden with debt. Fix a lower bound on the debt/equity ratio.
Sometimes, I also give priority to companies which have a healthy P/B ratio. You can create your own filter depending on what you think is important. But the idea is to have a plan before you start screening and picking your list of penny stocks.

You may want to search for a List of penny stocks or share your thoughts/questions in a comment.

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    Jul 23, 2009

    3 comments:

    Penny Stocks April 20, 2010 at 12:00 PM  

    That's really awesome.. I hope I can see more of this.. I am looking forward for your next post..

    henry@penny stock chat rooms April 28, 2010 at 11:51 PM  

    While we all dream about investing in the next Microsoft or the Home Depot, and actually mentally start calculating the profits, the sad truth is that the odds of finding out that once in a decade, success stories are slim since these companies are either start-ups or have purchased a shell company as it was cheaper than an IPO, or they just do not have a business plan that is good enough to justify investment banker’s money for an IPO. This doesn’t make them a bad investment, but it should make you be realistic about the kind of company you are investing in.

    Penny Stocks September 29, 2010 at 1:49 PM  

    Very good and useful things that you have written in your blog.

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