How to Find Penny Stocks before They Explode?

How to Find Penny Stocks

How to find penny stocks that can potentially grow in the future is perhaps the most commonly asked question by new investors? Finding undervalued penny stocks is one of the most popular strategies majority of investors try to accomplish. Unfortunately, there is no easy answer to this question. The best but also the hardest way in the quest of how to find penny stocks is to learn the fundamentals of stock analysis. There are several important strategies that professional stock traders apply to individual stocks to qualify them before purchasing.

Fundamental Analysis. One of the most essential and important strategy that evaluates stocks’ vital financial data, market scenarios, political and economic trends and many other factors going into these considerations. A company’s revenue and earnings along with their growth trends over the years can provide a lot of insight as to the success of a particular company. P/E ration is definitely one of the fundamental indexes to consider. To calculate it, simply divide a price per share by the company’s earnings per share. If a P/E ratio is low, this is a sure indicator that the stock is undervalued. This indicator should only be compared with relation to other penny stocks within the same sector and never cross-compared with other sectors. For example, technology companies are notorious of having higher P/E ratios because their stocks are always more expensive with lower profits. If you focus on a certain industry and figure out their P/E ratio, it is perhaps the best option on the way of how to find penny stocks that are undervalued.

The company’s management team is also extremely important when you are figuring out how to find penny stocks because these people make crucial decision that will result in a financial health of the company. Other considerations include whether the company has its share of competitors and how what edge they have to make their products stand out. Most penny stock companies do not do well with the fundamental analysis because their financials are not in the best shape, however, there has to be something about a certain company that will make you look further. Most penny stock experts recommend applying technical analysis to even the most active penny stocks.

Technical Analysis. This analysis allows investors to look at the stock prices and trading volumes over a period of time to determine how a particular stock fairs among its competitors. For example, if you are looking at marijuana penny stocks, you will also consider their competitors to see how this stock performs in the medical sector. Depending on the state of economy and whether it is a bull or bear market, social trends, investors speculate whether a particular stock rises or falls in price.

Some investors are learning on how to find penny stocks that might be currently underpriced by applying a very traditional Graham Number Technique. Benjamin Graham is considered the founder of this fundamental technique that helps investors find those potentially underappreciated stocks and invest in them. His calculation is focused on Net Current Asset Value index and investing in stocks that are about at two thirds of this indicator. To calculate NCAV, he recommends considering all of the company’s current assets (cash and equivalents, accounts receivables, inventory) minus all of the current liabilities; the result is further divided by the number of outstanding shares. This approach on how to find penny stocks should be further reinforced by looking at a company’s balance sheet, P&L and cash flow statements. Ben Graham believed that some of the most precious gems of stocks could be found when markets are affected by emotional ups and downs and he preferred selling the stock when the majority of investors were in a buying frenzy and vice versa. His approach is very similar to that of Warren Buffet’s, one of the absolute stock market tycoons of the century.

Most of these analysis strategies could only be applied to companies who are diligent about providing their investors and SEC with regular financial report filings. Penny stocks pink sheets companies are not obligated by law to file with SEC or with any other agencies for that matter so we recommend you avoid these stocks altogether.

To minimize penny stock risks it is worth remembering to invest within your means and stick to your investment plan. To not fall a victim to penny stock scams and to make your personal penny stock success stories, ignore at all costs any seemingly hot penny stock picks sent to you via e-mails or per friends’ recommendations. Only detailed analysis and understanding on how to find penny stocks priced below their actual values are a sure way to succeed in this volatile market.

And finally watch this YouTube video to learn more: