Penny Stocks Buyer’s Guide is a place for you to learn about penny stock investing and to gain the knowledge needed to develop an investment strategy. A method of discovery and research will empower you to make intelligent choices when selecting penny stocks to buy. It is important to have a clear understanding of the hazards and potential rewards of penny stock investing. Penny stocks are unique and can be differentiated from other stocks in many ways.
Factors Determining the Best Penny Stocks to Buy Now
Price, market capitalization, where the shares are traded, a company’s future prospects, the amount, quality and trustworthiness of information are all important factors to keep in mind before wagering your hard earned money. Developing a list of penny stocks to watch is an essential exercise in find the right stocks to buy.
There are many good examples of penny stocks have going up 100%, 200% or even 1000% or more in a year or even a day! What are your chances of realizing these types of gains? If you are signing up for free penny stock alerts the probability of you buying low the day before the alert is almost nonexistent. However, if you buy well in advance of an upcoming event, like a biotech company’s FDA approval or in anticipation of an oil driller’s discovery then the chances of buying low can be much greater. Chasing the herd is not how you make coinage when investigating penny stocks to buy.
What are Penny Stocks?
Penny stocks are low priced equities with the definition varying among government agencies, Wall Street analysts, brokers and every day investors. By educating yourself you can develop your own definition and criteria of penny stocks. Articles on this website regarding market value and where penny stocks are traded reveals the many criteria used in defining these stocks. The Securities and Exchange Commission (SEC) penny stock page classifies any stock with an existing price of less than $5.00 per share as a penny stock. Some brokers use different criteria to define penny stocks and may charge higher fees. Typically, the share price is used to delineate a penny stock, but the price may vary depending on the broker. For example, some brokers may set a price limit of $3.00 per share when establishing criteria for penny stocks. Others may discern a penny stock as one that is trading for less than $1.00. In other cases, any stock that is listed on the Over the Counter Bulletin Board (OTCBB) or on the OTC Markets is considered a penny stock.
Micro Cap Stocks
Penny stocks are sometimes referred to as micro cap stocks. Micro cap stocks are equities with a miniscule market value, with the SEC defining a micro cap stock as any company valued at less than $300 million. Nano cap stocks are valued at less than $50 million. Given the market values given above, a penny stock can have overlapping definitions with micro cap stocks and nano cap stocks. Penny Stock Buyer’s Guide provides a more complete comparison between micro cap stocks and penny stocks.
NYSE and NASDAQ Penny Stocks
The major exchanges, NYSE and NASDAQ require a stock maintain a certain price, among other factors, to be listed on their exchange. This price is usually more than $4.00 for an initial listing and $1.00 to maintain a current listing. There are also financial reporting requirements and market value thresholds that must be maintained if a company wants to keep their stock on one of the most prestigious exchanges. Given the price requirements, most penny stocks are usually listed on the OTCBB or the OTC Markets where stocks priced at less than $1.00 are commonplace. However, the NYSE and NASDAQ are exceptional places to find higher quality penny stocks to buy with good financial transparency. Zynga is one example of a NASDAQ penny stock. Zynga has a large market capitalization, strong balance sheet and above average growth prospects. However, due to the competitive landscape the stock price has slumped from the mid teens to trade under $5 dollars for over a year. Extreme Networks is another example of a NASDAQ penny stock. The company has a solid balance sheet with growing revenue and net income. Radio Shack is among the NYSE penny stocks we have reviewed. The company’s declining revenues and weak balance sheet have contributed to a long decline in share price and now it trades for less than one dollar.
It is important to verify that the penny stock is not about to be delisted. You can profit by selecting stocks on the way up and not on the way out to the OTC Markets. Our more complete overview can be found here.
OTC Penny Stocks
OTC Markets consists of several different tiers or levels of qualification with the OTC Pink having the lowest standards. OTC Pink does not have any financial standards or reporting requirements and is not regulated by the SEC. This is where the term pink sheets come from and the most risky penny stocks can be found here. The OTCBB is a quotation service providing real time quotes, last-sale prices, and volume information. Companies quoted here must maintain current filings with the SEC or other applicable regulatory agency. Please refer to our article on OTC Markets for more information.
The high volatility of penny stocks also brings about a certain amount of risk. Volatility refers to the degree to which the price gyrates up and down. The price action of penny stocks can move so rapidly that the value of the stock can lose most of its value in a single day. With that in mind, investors who seek excitement in the market will certainly get their fill due to the swift rise and fall of penny stock prices. Dramatic price swings have been detailed on this site. The extreme volatility of penny stocks potentially offers substantial gains and as well as complete losses. A few cents increase in price can quickly net 50 percent return but a few cents in the opposite direction can mean a devastating loss.
What are the Potential Rewards of Investing in Penny Stocks?
Penny stock investing can produce huge gains as well as losses. This nice thing about an investment is that you can only lose 100% (as long as you don’t do short selling or other riskier financial transactions) of your money but you can gain 100% or more. For example, when you buy a stock for $.50, if the stock goes to $0 you lose 100% of your investment. However, this stock has the possibility of going to $2.50, which is a 400% return on your investment.
Trustworthy Penny Stock Information
Investment in any financial opportunity carries a certain degree of risk and investing in penny stocks is no exception. However, there is higher peril associated with trading penny stocks compared to trading well capitalized stocks listed on the major exchanges. Investors who are educated about the risks associated with penny stocks will be better able to make sound decisions and avoid many of the hazards.
One reason investing in penny stocks carries a high degree of risk is because there is often very limited information available for most of the companies. Performing adequate research when searching for penny stocks to buy will provide you with sufficient details to determine if a company is worth the investment. However, the information needed to undertake the necessary research is often missing and there are many reasons for this.
Newly formed companies have limited information available for analysis. This is particularly true for companies on OTC BB and OTC Markets. Therefore, you should not rely on second rate sources of information. Reliable sources of information include reputable news providers such as Forbes, CNN, Investor’s Business Daily and Wall Street Journal.
Researching a Company’s Future Prospects
The potential for profiting from a penny stock pick becomes greater when you undertake a sound research methodology. As with any stock, the financials are indispensable tools for investors who are searching for penny stocks to buy. While it is important to be able to understand the information on a balance sheet, income statement and cash flow statement, it is critical that you take note of the quality of the data. Information such as the timeliness in which the company files their financial statements and who is responsible for auditing the statements can provide details that allude to the company’s condition. It is also essential to read the footnotes to avoid missing critical information that may relate to the company’s financial status.
Investors should understand the mechanics that are involved in market capitalization and share structure. A thorough awareness of the probability of dilution and degraded investment value associated with dilution are essential. Many penny stock companies depend on raising money to stay in business by selling more shares and diluting the value of the existing shares. This is especially true for companies with no revenues and high research and development costs such as oil exploration, biotechnology and medical device companies.
When searching for penny stocks to buy, investors should focus on companies that have shown revenue growth, and consistently produce cash. Companies can be small and still show revenue and earnings growth. The investor should evaluate the company’s assets and liabilities to further gain a clear picture of the stock’s worth. In many cases this information is not available. This is especially true of OTC Markets Pink listed companies which are unable or choose not to provide public information.