The Penny Stock Attraction and What You Must Know

There are virtually thousands of penny stocks available and each day, new ones are listed. Often, a trader’s dilemma is making the right pick. The insights you need to choose a penny stock might be trader-specific, but there are general tips that will definitely be of great help when looking out for worthy penny stocks.

Penny Stock - Definition

Basically, this is a stock with small market cap, mostly illiquid, trades at less than $5, and often listed on smaller exchanges.
The penny stock market is often referred to as an OTC (over-the-counter) market because its structure and oversight are not like the major equity markets. Penny stocks are mostly issued by new, struggling, non-existent or sometimes worthless companies and they are often listed and traded on ‘pink sheets and OTCBB.’

Penny stocks are highly speculative and are considered a speculative investment due to possible illiquidity, limited shareholders data, volatility, limited disclosure, mismanagement and little or no regulatory oversight.

Case Study-Famous Corporations Traded as Penny Stocks

Ford Motor Company is a surprising example for so many, but as a matter of fact, it did trade below $2 per unit share; just around the period, GMC was on the brink of bankruptcy.
As profiled in October 2008 by a North American Penny Stock expert, Peter Leeds, Ford traded at $1.87. At present, Ford has attained a more appropriate stock valuation per unit share of $8.42.

How to Identify and Evaluate Penny Stocks

A trader’s ability to identify penny stock trends and evaluate the possibility for profit is very important. Penny stocks can be evaluated by using either a candlestick chart or line graphs both of which are referred to as Technical Penny Stocks Analysis.

The Russell 2000 Index is one indicator that an investor can leverage on. It is a small cap stock index and it gives you a great deal of information about penny stocks. But this is to be used alongside the trading data of the specific stock pick. The January 2019 to date chart shows a progressive gain so far with the index peaking at 1542.94 as of February 15.

The Technical Analysis (TA) for Penny Stocks provides useful insights. However, an investor should not be overly reliant on TA as they can be misleading at times due to the volatility of penny stocks. It is best to develop a trading strategy that suits you.

Assessing underlying Assets

To assess a penny stock’s underlying asset, you need to take a look at these pointers:

1.Trading History

If the company is new, it might have no trading history. If it has been around for some time, you might be able to check out its trading results.
• Does it have a positive return on investment?
• Is its gross profit percentage positive?
• Is the company’s ratio of assets to liabilities positive?
These are just a few questions to explore and if the answers are in the negative, you can be sure the company is going nowhere, and the penny stock is worthless.

2.Management Team

Check out the management team behind the organization you are investing in. Who are they? What’s their pedigree? Most likely than not, faceless corporate players are crooks with nothing to lose. The more public the team information can be, the more likely they are genuine.

3.Product Delivery

What is the forte of the company? Do not throw money at any stock because its price is soaring. Is there a tangible product or service traceable to the company? If not, you might just be dealing with a basket case.

4.Market Fortunes

Not all companies with a recognizable name or product will endure. You need to be sure that the company’s forte has a chance to succeed. Is this company churning out a marketable product? This is an important question and you might only find answers if you check out industry reviews.

Invest Safely

To protect your interest, ensure that you only trade stocks listed on major exchanges such as NYSE, AMEX or NASDAQ as these platforms are efficiently regulated against spurious changes.

Some NYSE Penny Stocks include:

Alcatel-Lucent (ALU), American Oriental Bioengineering (AOB), Bluegreen Corporations (BXG), China Hydroelectric Corporation (CHC), Radian Group Inc. (RDN), Willbros Group (WG) and many others.
You must also know when to back out if the market becomes unfavorable. Failure to consider these factors may cause an investor a fortune.

Bottom Line

Trading penny stocks are not inherently bad because some legitimate companies with potential for real growth do appear on the scene.
Of course, some investors have made a fortune from penny stocks and this is often a drive for others to invest. If you have done your numbers well, you will be able to get a good fit.