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It's enticing to look for hot penny stocks to buy as a way to grow your wealth. Because the share price is low ($5.00 or less, to be classified as a penny stock), the stocks can show dramatic moves – which could mean a big payoff for you.
Last week, for example, several penny stocks soared on quarterly earnings or company news updates. Synacor Inc. (Nasdaq: SYNC), a technology company, climbed 130% on the week on robust earnings in 1Q. For the year to date, it is up almost 187%. VBI Vaccines Inc. (Nasdaq: VBIV) moved up nearly 80% on news of a planned merger with SciVac Therapeutics and is up 160% year to date. (Note that this is a report of stock price movement only and not a Money Morning recommendation.)
Sound good? However, investors also need to use caution when looking at penny stocks to buy.
Stock markets fluctuate. Penny stocks may fluctuate even more.
Their products may be in development, which means share prices are based on projected products to market far out in the future. They can move significantly up or down on news about their products or plans. Finally, of course, the volatility is heightened by the small share prices. Moves of a few cents can add significant percentages to a penny stock, up or down.
That said, there are also investment gems among penny stocks. The key for investors is to use appropriate caution when approaching a speculative investment class like penny stocks.
So, how do you approach investing in hot penny stocks?
Research Is Key When Finding Hot Penny Stocks to Buy
One crucial element is to know and be comfortable with your own risk tolerance. The simple fact is, people vary in their comfort with risk. Some investors, receiving a 50% guarantee of a 50% gain or a 90% guarantee of a 10% gain, would jump at the latter but balk at the former. Others would enjoy the chance of the former and scorn the latter as overly safe.
Which are you? There are a number of questionnaires that help you assess your risk-reward tolerance, many you can find online from respectable investment publications.
While your own preferred style is one area to do a bit of research into, another one is the financial and product outlook for the company itself. It's one of the most important things you can do while looking for hot penny stocks to buy.
You can find information in multiple ways. If the stocks are followed by the investment community, find the reports. Many companies also provide their annual reports and financial statements on the web or via mail. You can call and request the information, too.
Hot Penny Stocks to Buy Often Have Innovative Products and Markets
As you assemble information on hot penny stocks to buy, remember that the best penny stocks often have innovative products, technologies, or methods. Growth markets can also lead to strong price performance.
One of Money Morning's top penny stock picks, for example, is Ekso Bionics Inc. (OTCBB: EKSOD), which is engaged in the human augmentation market. Its exoskeletons are a form of wearable robot, providing mobility to patients with mobility issues. Due to the strength of both products and markets, Money Morning Chief Investment Strategist Keith Fitz-Gerald believes the stock price can move from today's $6.00 to $21.85 in four years.
With Penny Stocks, Focus on the Major Exchanges
While penny stocks trade broadly, on both the Pink Sheets and Over-the-Counter Bulletin Board (OTCBB) and the NYSE and Nasdaq, it is best to focus on the latter two.
Why? The major exchanges require larger market capitalization, steady trading above $5.00, and have stiffer reporting and financial requirements. While good penny stocks can trade on the Pink Sheets and OTCBB, the NYSE and Nasdaq lend degrees of transparency and stability that can be very beneficial to investors looking for hot penny stocks to buy.
Balance Your Portfolio
One of the best cautionary measures investors interested in hot penny stocks to buy can take is appropriate balance and allocation in their investment portfolios.
One way to allocate goes as follows… Put 50% in what we call base builders. These are defensive stocks, they do well even when markets take a hit, and their long-term potential for share-price growth is among the strongest on the market. Then put 40% in global growth and income stocks. These have higher than average dividends. The final 10% goes in "rocket riders." These stocks are more volatile than most, but they have a special situation or catalyst that could propel shares higher in a quick amount of time.
Penny stocks could be part of the 10%, although by no means all of it.
Fuel Cell Energy: One of the Hot Penny Stocks to Buy
Given these cautionary mini-tales, what should an investor who wants to invest in penny stocks do?
Fuel Cell Energy Inc. (Nasdaq: FCEL), engaged in hydrogen fuel cells, is a hot penny stock to consider buying today.
Why? It has new and innovative products that are considered in the "green energy" business. For the past decade, its primary focus has been a certain kind of fuel cell power plants.
Fuel Cell builds and operates these plants. In addition, it has worked on a technology to increase fuel cell efficiency.
Another segment of FCEL's plan is capturing emissions from non-green energy, like natural gas and coal.
FCEL is also benefiting from interest in its business on the part of major U.S. companies. Early this month, it inked an agreement with energy giant Exxon Mobile Corp. (NYSE: XOM). FCEL is XOM's partner in fighting climate change, by working on technology that will limit the carbon dioxide emissions that lead to greenhouse gasses and climate change.
FCEL's stock price rose nearly 20% on news of the partnership agreement.
We think these shares could double in value.
Roth Capital also recommended the stock in April. It estimated the Fuel Cell stock price would double in a year.
This isn't the only hot penny stock to buy now. We cover a handful of lower-priced shares in our Private Briefing investment service. Continue here to get more info on how to get started with those picks – and growing your wealth – today.