Penny Stock Investing Tips
Penny stocks are stocks selling at a price below a dollar. Also known as micro cap stocks, they are very popular with investors who hope to find the next Walmart or Apple Computer. The majority of penny stocks are unlikely to see serious future growth, as many stocks trading below a dollar represent companies that are underfunded, poorly managed or in bankruptcy proceedings. There are a few gems in this group though, and investors who do their homework and follow a few important rules might get lucky.
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Keep Exposure Low
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Penny stocks are very risky. It is important for investors to risk only a small percentage of their overall portfolio in this group. Think of penny stock investing like buying a lottery ticket. Buying $10 worth of lottery tickets gives you an opportunity to win, but investing your life savings is foolish.
Focus on the Long Term
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Penny stocks are very difficult to trade profitably. They trade on the over-the-counter market, which is unregulated. This leaves them more prone to market manipulation, which can lead to trading losses. The Motley Fool advises after you do your research and find a sound company with potential for future growth, hold onto it for at least three years. This will give the company time to prove itself.
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Focus on Management
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Micro cap means small capitalization. In other words, penny stocks are companies that are arguably underfunded. It takes a strong management team to develop a company and create future growth potential when funding is low. Take some time and research the management team before you invest in a penny stock. Look for managers that have good track records. In addition, look to see if the company has reported earnings on schedule regularly. Late earnings reports oftentimes indicate the management team is unfocused.
Reverse Engineering
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If you want to find the next Walmart, go back and look at the early traits of Walmart. For example, Walmart began paying a dividend just a few years after it became a publicly-traded company. Moreover, it started paying dividends right in the middle of bear-market (downward) conditions. Walmart was also a company that wasn't taken seriously in its early stages. Look for companies that are unknown and that exhibit other similar traits of companies that have grown in to leading companies after starting small.
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References
- Photo Credit Bankrupt. Businessman with empty pockets (with clipping paths) . image by Vitaliy Pakhnyushchyy from Fotolia.com
