How to Choose Penny Stocks
Penny stocks are stocks that are priced lower than $5. Because they are cheap, investors find them very tempting. With just a few hundred dollars, you can double or even triple your initial investment if you make the right decision. To successfully invest in penny stocks, you should follow some useful steps that can help you spot potential penny stock deals and avoid scams.
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Instructions
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Know what price range to look for. Because most traders want to buy penny stocks that have lots of room to rise, they should buy those priced between 5 cents and $2. The average price for penny stocks is 10 cents. If you choose to buy stocks that are priced higher than $2, you will have fewer candidates.
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Choose penny stocks that have high daily volume. Do not pick a stock that has average daily volume less than 100,000 shares. This is to ensure the high liquidity of the stocks you are buying. The higher the liquidity, the better the chances of being able to buy and sell the stock whenever you want. Low-liquidity stocks are harder to buy, and you may find you cannot find buyers when you decide to sell the stocks later.
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Pick stocks that consistently move higher. Look for stocks that have a nine-day moving average greater than the 18-day moving average. This suggests an uptrend.
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Rule out stocks that have negative earnings per share (EPS). Earnings per share, according to Investopedia, are "the portion of a company's profit allocated to each outstanding share of common stock." EPS is an indicator of the profitability of a company. A negative EPS, therefore, indicates the company is incurring a loss.
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Check news about the penny stock you are considering. If the stock is generating consistent good news in the business media, there is potential for a further uptrend in the near future.
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Tips & Warnings
Use a stock screener to easily spot potential penny stocks worth buying (see Resources). There are many free as well as paid stock screener services available. The key is to look for a screener that can perform searches based on both fundamental and technical criteria.
References
Resources
- Photo Credit british one penny image by John Sfondilias from Fotolia.com
