What to Look for in a Penny Stock

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Penny stocks are a type of stock that trades for small share prices and are highly speculative in nature. Investing in these stocks can provide you with the opportunity to bring in large potential returns. However, you have to know what to look for in these stocks if you hope to be successful.

Innovative Business Concept

  • When you put money into a penny stock, you are not simply choosing an investment at random in hopes of it going up. You are actually buying a share of ownership in a small company. When you choose a small company to invest in, you want to find one that has an innovative business concept. You do not want to put money into a business that is simply doing what everyone else is doing. You want it to be innovative. If possible, you want to invest in a small business that has been profitable for a few years before going public.

Trading Volume

  • One of the issues with investing in penny stocks is that they tend to have very small amounts of volume. This can make it difficult to trade the stock once you get some shares. The volume of most penny stocks is very low compared with stocks that are listed on the major stock exchanges. Before choosing a company to invest in, make sure that you are dealing with a stock that has a decent amount of trading volume on a regular basis.

Under the Radar

  • When looking at penny stocks, you want to find a company that is fairly under the radar. You want a stock that is not getting a lot of attention from analysts or from other sources. Companies that are not almost entirely owned by institutional investors are typically more attractive. This way, if a company is solid, eventually it will start to get attention from analysts and institutional investors. At that point, you will already be an investor, and your investment can grow substantially.

Effective Management

  • Good companies are often managed by those who have good track records. If you can find a penny stock that is managed by someone who has already been successful in the business arena, this could be a solid investment. In some cases, after managing a large company in some capacity, CEO's or other top executives leave to start their own companies. If you can get in on the ground floor of these companies while they are still small, you can sometimes make a solid return.

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