Selection is the Name of the Game
Finding the penny stock gems in any market requires careful study and sometimes also a special intuition. On the web pages “A Basic Guide to Penny Stocks” and “Penny Stock Training” you have read about investing in the stock market and the reasons why penny stocks can be hugely profitable. You have learnt that flourishing, strong companies are the backbone of great stocks, and also that you can make a lot of money by buying the stocks of major companies when they were small and their stocks cheap. You need a strategy when investing in penny stocks, a system which will assist you in separating the winners from the losers. Finding the real penny stock gems will require rigorous study, but can be an exhilarating experience.
The ABC of successful penny stock selection lies in the selection of companies. Thus the same criteria for buying all other stocks are also applicable to penny stocks. So, what do you have to look for in small companies that will convince you to buy their stocks? There are a few factors to look at:
- Product: Has the company got a product to offer that can compete effectively with opposition in the same niche? Or, has the company identified a potentially lucrative business opportunity to take advantage of, and consequently got its nose in front of other potential competitors? For instance, to deliver essential software for cell phones in a developing country.
- Profitability: Does the company make money and can you go by its financial reports? What are its debt levels? Has it got a substantial bank balance to fund expansion and development?
- Growth: An excellent instrument to measure a company’s growth is Headline Earnings per Share (HEPS). This is calculated by considering after-tax profits, less preference dividends and less items which fall outside the main activity of the business, divided by the number of ordinary shares issued. The percentage increase of HEPS on a yearly basis should rise for a considerable period of time (three years preferred by many analysts and portfolio managers).
- Management: Is the company managed by reputable, trustworthy people and do they communicate properly with the shareholders? Do they publish financial reports on time? Are they not involved is insider trading? A point to remember: If directors of the company are buying its shares (in a legitimate way), it’s a good sign, because it demonstrates confidence in the company. You are entitled to contact the company if you have questions. In fact, you can pay a personal visit to its head office to form an opinion of the degree of efficiency which is exercised in managing the business.
- Resilience: How resilient is the company? How do external factors such as interest rates, inflation, fuel price or other unexpected events impact on it? If a share goes against the trend, for instance its price goes up, when most of the shares in that specific sector tend to go down, it may confirm that the company whose shares you possess, can resist bad market conditions and is internally strong.
A second method to find the gems among the penny stocks to invest in, is to consider what is termed technical analysis. A variety of indicators presented as graphs shows statistics on shares and market sectors. Using these indicators can give you an indication of the current achievements of market sectors, and also assist you in selecting the best stocks in a specific sector. The great value of technical analysis is that it assists you in your decision when to buy and when to sell a stock.
Finding the best penny stocks has become a scientific endeavor. For instance, James Connelly (also known as the “Penny Stock Prophet”) has developed a formula according to which he applies a tool, Psychological Support Level (PSL) with four variables to predict the movement of undervalued stocks.
Adverse economic conditions during which stock prices fall, at times offer good buying opportunities. Often when the stock market’s big indexes are struggling, investors turn to the small/micro cap sector, where you find the penny stocks. Penny stocks are not so closely linked to general market movements. When the big investors begin to spend big money in the small cap sector, this signifies greater liquidity, which in turn brings bigger gains for the penny stock traders.
Also, as a result of the decline in stock prices, many excellent stocks become undervalued, which means that buyers have the opportunity to acquire those stocks at a considerable discount. Quite often, penny stocks with huge potential can be picked up at ridiculous prices. You should always be on the lookout for such bargains.
What amount should I invest?
People tend to invest small amounts of money in penny stocks because they are relatively cheap. This makes sense, if broker’s fees and other transaction costs are not taken into account. But consider the following configuration of a stock transaction: If you invest $2 500 in a stock, your transaction costs will amount to approximately $100 for buy and sell. That implies a gain of 4% on the stock before you break even. So if you purchase only $500 worth of stocks, your costs will amount to over 20%. Thus, you will only break even after this stock has risen by 20%.
One word of advice, and this is really important: Make sure that you can afford to buy stocks, even if they are inexpensive. Buying stocks with borrowed money is risky, and should rather be avoided.
Finding the best penny stocks can be fun, on condition that you know what you are doing.
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What subscribers to The Penny Stock Egghead have to say:
I’ve been subscribing to PennyStock Egghead for about a year now and have loved the objective advice Nathan gives. He really does look for quality stocks and I’ve made some pretty nice profits on a lot of his suggestions. Being still fairly new to investing I have been dabbling a lot in penny stocks to try and grow my account. I may not have a big account, but it’s a lot bigger than it was a year ago. On just one of Nathan’s picks this year I managed to make my investment back ten-fold!
With so many penny stock scam sites on the net, I’m thrilled to have been able to find someone that is such a straight shooter. I don’t like reading a lot of fluff and Nathan’s reports are always straight to the point and neither too long nor too short. I’ve signed up for several websites this year and some reports bore me to the point where I can’t even get past the second paragraph. I always look forward to Nathan’s next stock announcement and especially love how most of them are very low priced. I can afford them and have made a great profit on several of them! I trust this guy!
