How to Pick a Good Penny Stock
Penny stocks are risky investments, as they involve companies that trade at less than $5 per share and have market caps of up to $200 million. If you are an experienced investor and have a broad portfolio, you may find the value in taking some chances with penny stocks. Picking a good penny stock is an art that requires some knowledge of the companies involved and some luck.
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Instructions
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Become experienced with picking stocks on the stock market. If you gain at least six months' experience choosing which mid to large stocks to choose, you will begin to understand what to look for when selecting quality companies in which to invest.
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Learn the elements of a quality business. Learn what good profit-and-loss, cash flow, income and expenditure statements look like.
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Choose penny stock companies that increase their cash flow over time. Organizations that have minimal debt and that expand on the amount of cash they have on hand are more likely to thrive in the future than companies with sizable debt and small amounts of cash.
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Look for companies that are traded on the major U.S. exchanges and that have decent-sized yearly revenues. Companies that already bring in more than $10 to $12 million per year are more likely to continue growing than companies that bring in annual revenues of less than $10 million.
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Select companies that are in industries that you are familiar with. If you are an electrician by trade, you are more familiar with companies producing new technical products than you are with companies offering medical services, for example.
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Tips & Warnings
Do not invest more than 10 percent of your overall available funds in risky penny stocks.
Avoid investing in penny stocks that send you emails encouraging you to invest in them; these stocks have a greater risk of being scams.
References
Resources
- Photo Credit Stock Market image by Paul Heasman from Fotolia.com
