How to Use a Penny Stocks Guide

You've decided to leap into penny stocks. The promise of just a few bucks turning into a few hundred thousand is certainly attractive. Microsoft was once a penny stock. But, if you're having trouble separating the Microsofts from the "microbombs" then you should use a penny stock guide.

Instructions

1. Determine what the company does to earn money. Because penny stocks have less regulation, they can be manipulated and are often part of larger scams, where people get everyone to buy in, they sell at the top and you're left holding the bag. One way to avoid this is to determine what the company actually does to make money. If you can't, then move on to the next stock on the guide list.

2. Look at the company's financial records. There's no secret that penny stock companies are most likely in debt. That's why they sold stock in the first place, to raise capital. But, what you are looking for is growth. If the company is continually selling more product quarter after quarter, you are onto something. Just know that this separates the men from the boys, so you may search a hundred companies on the penny stocks guide, before finding the special one.

3. Inspect the gross margins of the company. The other thing to look for is that for every item a company sells, they are making a decent amount of money on it. If it costs them $10 to make an item and they sell them for $7, they aren't going to be around very long. All of this information is available on the company's quarterly filings.

4. Track the suggested penny stocks for a while. When you use a guide, they often give 20 to 30 names of companies per month. That's a few hundred a year. There's no way you are going to buy that many stocks. Create a mock portfolio where you keep these companies and watch it. See which companies start to emerge. If you really find the next Microsoft, you may miss the first couple of bucks on the stock price, but for a long term investor there will be many more to come.

5. Buy your penny stocks over the course of time. This is advice for any kind of equity investment. You never buy all at once in case the market corrects, or the company outlook changes. That way if the price goes down, then you've protected your downside risk. If it goes up, you've made a little money and can be confident in your decision to buy more.

6. Do your homework every quarter. The days of "buy and hold" are long gone. You must re-evaluate your company each and every quarter to make sure it is still a solid investment. If not, it's time to move on to another stock.

7. Be patient with your penny stocks. Microsoft didn't grow overnight. Companies that are not well known take a while for people to start noticing them. But when the big boys start buying, get ready to go along for the ride.