Promising Penny Stocks to Invest in – How to Spot Them?

Promising Penny Stocks

Finding promising penny stocks for a beginner investor is perhaps like looking for a needle within a haystack, seemingly impossible. Despite this fact there are a lot of penny stock success stories that savvy investors share in hopes to get more people educated on finding their personal profitable penny stocks.

The amount of effort you put into finding promising penny stocks will pay off opposed to blindly picking hot penny stocks lists that somebody else compiled. One of the biggest mistakes any penny stock investor can do is to invest for the wrong reasons, namely, to choose to invest in micro caps recommended by a friend or a tip received via an e-mail or a TV infomercial. Most of these “tips” are downright scams or ill fitted advice. Diligent research and perseverance are the only components that will make you succeed.

The best way to avoid penny stock risks is to get educated and try to get your feet wet by doing paper trading. This is a proven way to understand which strategies are working for you and which are not. Picking promising penny stocks and pretending to purchase about $1000 worth of them is the first step in paper trading. By recording the date of the purchase and the strategies that went into decided why to buy will help analyze this pick down the road. Now it is important to monitor the stock’s price several times daily and deciding when to sell. The result should be carefully analyzed and recorded for future reference. Many professional penny stock traders started their career with paper trading.

Instead of focusing on finding the top promising penny stocks, some concentrate on eliminating bad picks by following a simple set of criteria:

  • low liquidity stocks are almost always a bad idea because if purchased, these could be impossible to sell
  • late financial reporting or lack thereof are two warning signs telling you to stay away from this company
  • hot picks sent by an e-mail creating a hype and triggering a buying frenzy
  • Pink Sheet companies are extremely risky and should be avoided altogether by beginner investors

Once you eliminated downright bad penny stocks, focus on a pool of companies that might make the cut for you and apply either fundamental or technical analysis. Very rarely will you find a company that excels in all of the parameters because most of them are still in the ripening stages hence the low stock prices. Looking further and sorting through pros and cons of a particular company will help you decide whether the stock might fall in the category of promising penny stocks for you. Overanalyzing can backfire in some cases but some investors swear by going the extra mile by actually contacting the company’s public relations department and asking all the right questions. Some will even go through the trouble of purchasing the products the company is offering and deciding for themselves if they like them. We are by no means suggesting, you should do the same, but doing the basic analysis is important.

Finding an investing strategy that appeals personally to you is another way to sort through thousands of choices on the market. Some savvy investors resort to shorting penny stocks, which means betting on the stock prices to go down. While everyone on the market is hoping for their promising penny stocks to go up in price, there are some who pray for some stock picks to go down. Penny stocks shorting works by borrowing shares from a broker for a fee under a contract and selling them while the prices are still high. The companies that are picked for shorting are mostly the most hyped over and overinflated stocks that are almost always doomed for decline. Once the prices decline, the set of stocks that had been borrowed from the broker are then repurchased for a much lower price and successfully returned to the actual owner. The difference between the selling and purchasing prices is the profit in this case. This strategy will not work however if the prices of the stocks keep climbing up resulting in a loss.

One of the best kept secret that seasoned investors are not telling you is they make money on all sorts of stocks, good, bad, penny stocks that pay dividends or not and everything in between. The most important factor is knowing when to get in and out and move on.