How to Invest in Penny Stocks Safely
Penny stocks are a much maligned investment alternativebecause of the undesirable press they receive powered by frequentlydishonest activities that troublethe industry. Pump and dumps, the practice of artificially growing a stock price so that you can sell stock at a higher price, is considered the mostwell known techniqueused by lots of penny stock owners and shareholders.
These types ofstrategies are actuallyfound in every equity market, the effects on penny stocks are evidentthanks to comparativelymuch less liquidity, minimal investor sophistication and a lack of information.
Even though penny stocks are fundamentally more risky that larger cap stocks, such as those listed on the NYSE and NASDAQ, it needs to be remembered that a few of thelargest sized companies listed in the United States were once considered micro cap stocks. There isn’t a better example than Apple, which in 1996-1997 traded below $4. Now it ispriced at at $420 and it isthe largest company worldwide by market value. Other stocks that now trade above $25 but were once considered penny stocks include Green Mountain Coffee Roasters Inc, Netflix Inc, and VirnetX Holding Corp.
Penny stocksprovides for significant growth opportunity in an individual’sportfolio if you knowthings to search for.
First, doing researchis important. Have a look at the industry the company operates in. Might it be a growth sector? Can there be potential to expand in another country? Are there any political or regulatory problemsthe company faces?
You have totake time to go throughall of the corporation’s SEC filings. This enables you tounderstand the market they are in, and just howthe business has been doing now, and plans to grow in the long run.
Try to find red flags. Has the organizationmodified its name, ownership and industry throughout the years? Does the corporation rely heavily on related party transactions for its income, or funds? Has the CEO or senior management ever been the subject of an SEC investigation?
You alsoneed to do basic research on the company’s management group. Have they gota record of running or growing companies? How suitable is their prior experience and knowledge? A reputable and trustworthy management team is asignificant factor when decidingwhether to invest in a penny stock.
Finally pay attention to the company’s valuation. Though it may benormally expected that micro cap stocks have minimalrevenues, and/or significant debt levels (especially start-upcompanies), the value of the organization should reflect this. Should the value of the corporationisn’t in line with its financial statements, and there is nosatisfactory explanation for this, there might very well be manipulation of the stock. In which case, avoid altogether.
These types ofstrategies are actuallyfound in every equity market, the effects on penny stocks are evidentthanks to comparativelymuch less liquidity, minimal investor sophistication and a lack of information.
Even though penny stocks are fundamentally more risky that larger cap stocks, such as those listed on the NYSE and NASDAQ, it needs to be remembered that a few of thelargest sized companies listed in the United States were once considered micro cap stocks. There isn’t a better example than Apple, which in 1996-1997 traded below $4. Now it ispriced at at $420 and it isthe largest company worldwide by market value. Other stocks that now trade above $25 but were once considered penny stocks include Green Mountain Coffee Roasters Inc, Netflix Inc, and VirnetX Holding Corp.
Penny stocksprovides for significant growth opportunity in an individual’sportfolio if you knowthings to search for.
First, doing researchis important. Have a look at the industry the company operates in. Might it be a growth sector? Can there be potential to expand in another country? Are there any political or regulatory problemsthe company faces?
You have totake time to go throughall of the corporation’s SEC filings. This enables you tounderstand the market they are in, and just howthe business has been doing now, and plans to grow in the long run.
Try to find red flags. Has the organizationmodified its name, ownership and industry throughout the years? Does the corporation rely heavily on related party transactions for its income, or funds? Has the CEO or senior management ever been the subject of an SEC investigation?
You alsoneed to do basic research on the company’s management group. Have they gota record of running or growing companies? How suitable is their prior experience and knowledge? A reputable and trustworthy management team is asignificant factor when decidingwhether to invest in a penny stock.
Finally pay attention to the company’s valuation. Though it may benormally expected that micro cap stocks have minimalrevenues, and/or significant debt levels (especially start-upcompanies), the value of the organization should reflect this. Should the value of the corporationisn’t in line with its financial statements, and there is nosatisfactory explanation for this, there might very well be manipulation of the stock. In which case, avoid altogether.
If you are interested in building wealth through investing in penny stocks, please check out Stock Shock and Awe for more information on stock trading and investing.
