Penny Stocks

Penny stocks make excellent investments…if you pick the right one. The world of penny stock speculation can be exciting, fun, and profitable, but it takes a dedicated person to sort the diamonds from the rough.

What is a Penny Stock?
A penny stock is defined not by selling for less than $1.00, but for selling less than $5.00. Penny stocks are usually listed on the NASDAQ or the American Stock Exchange, and are only occasionally found on the NYSE, which places stock price minimums on listed companies as well as total market cap minimums.

A penny stock does not come with any extra special classification, nor does it have some brand or label that divides it from the rest. A penny stock is different from the larger and higher-priced companies in that it sells for less than $5.00 per share.

Penny Stock Shopping
The reason that so many people like penny stocks as an investment is the same reason that so many people don’t like them: they’re risky. The majority of penny stocks were once very successful firms that either had an excellent business or strategy, but were later bumped out by competition, or failed to take on new challenges after their products became outdated.

There are, however, a great number of penny stocks that don’t have such a rough history. These may include foreign ADRs, or dual-listed entities. Penny stocks may also be a firm that is considered to be a “small business” with few employees and only marginal revenues, but chose to list on the public exchanges in order to reward its employees with stock options, or other incentives.

Why Opportunities are Abundant
One thing that investors realize quickly about penny stocks is that most investing professionals avoid them. Few are followed by analysts, and even fewer are owned by institutional investors. In fact, by law, mutual funds cannot, under any circumstances, buy into a stock that currently sells for less than $5.00.

With that much cash legally disallowed from buying and selling penny stocks, there are plenty of opportunities for investors to buy great penny stocks at a discount, reaping the rewards all the way up to $5.00 per share. It is at $5.00 that the big institutional investors can start accumulating shares, thus allowing for impressive growth in share price above and beyond the $5.00 threshold. Imagine if you were to ride a penny stock from $2.50 to $7 or more. You would be pretty happy with those returns, wouldn’t you?

Scanning for Pennies
One of the reasons that hedge funds, one kind of institution that can buy penny stocks, mostly avoid the penny stock market is because there are so many thousands of penny stocks. Covering all of them, and researching each in depth would require literal armies of analysts.

Their desire to avoid the dirty work, though, presents ample opportunity for the average investor. Using a common stock screener, investors should be able to sieve through many thousands of stocks that meet only the criteria the investor sets forth.

This would include anything from earnings per share, to dividends, and even share price. Investors can also segment stocks with certain return profiles, or those that operate in a specific geographic area or industry.

By utilizing a stock screener, investors can examine thousands of stocks topically, before doing more in-depth analysis later on only the stocks that look especially attractive. Generally speaking, it takes only a moment’s glance to determine whether a stock is worth a look into. Chances are that stocks with growing earnings and improving balance sheets should warrant additional investigation, while companies that are hemorrhaging cash in ordinary operations do not warrant further research.

Take Your Time
Investors in penny stocks should realize that they may wait years before a penny stock reaches its realistic value on the stock markets. As mentioned before, penny stocks are not covered by analysts and are thus prone to rest at market lows before analysts and fund managers begin covering the companies and buying their shares.

When a penny stock does finally get noticed, lookout! It is a fast ride to the top when big institutional investors move millions of dollars into tiny, publicly-traded firms. Beat the institutions into the pennies and you’ll beat the markets every time.

[catlist id=4 numberposts=100]