How to Build a List of Penny Stocks
Penny stocks are generally considered to be stocks that sell for $5 or less. Most people hope that they can buy thousands of shares of these stocks for very little money and get rich when they go to $100. Although this can happen, it doesn't happen that often. If you're interested in investing in penny stocks, there are a few things to should look for.
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Instructions
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Find a reliable trading service that specializes in penny stocks. These will provide you with a list of stocks to consider each week. A few that you might consider are Microcapmillionaires, PennyStockProphet, and Global Penny Stocks. As of 2010 these services cost $50 to $75 per month.
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Make your own list. If you wish to compile a list from your own data, here are a few criteria you should look at:
Management. How experienced is the management team behind this venture, and do these managers have a proven track record of success. If the team has successfully built and managed other ventures, it has a better chance of success. If these are fresh grads from college, it would probably be better to look elsewhere.
Earnings or sales. Although most penny stocks will not have earnings, if they do look to see whether there appears to be sustainable growth from quarter to quarter. If they don't have earnings, look at their overall sales, and find out how long they predict before they turn a profit by reading the investor's prospectus. Also look at their debt-to-sales or debt-to-earnings ratios to see what the profit potential is. If debt is growing faster than sales, that's not a good sign.
What's the story behind the company. Is the industry that the company is in sexy, is it a large potential market, and is there a lot of buzz around it? If so, look to see whether analysts are covering the stock and what they have to say about it. If an analyst says something positive, that doesn't necessarily mean the stock is great, but that opinion is worth reading.
Catalysts. Look for a news event that might cause the stock to jump. Things such as a breakthrough in technology, recent signing of a large client, a big sale, a new partnership--any of these things can cause the stock to move violently.
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Find a stock screening tool to run your analysis through. This will cut down on your research time by giving you a tool that you can enter your criteria into; it will spit out a list of stocks that fit them. A few that you might want to use are MoneyCentral, MarketWatch and Yahoo Stocks (see Resources section). As of 2010 all of these were free to use.
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References
Resources
- Photo Credit pennies image by studio vision1 from Fotolia.com
