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Wondering which penny stocks to buy for 2016? Penny stocks can be alluring investments simply because they can return large percentages in a day or week of trading.
Take the shares of Cinedigm Corp. (Nasdaq: CIDM), an entertainment enterprise engaged in distributing and aggregating software, independent films, and related digital content. In mid-May, the stock skyrocketed 532% in one week.
Why? Insider Financial reported that the company had 2 million app downloads and more than 400,000 registered users as of March 31, 2016. The company also has developed relationships with more 60,000 brick-and-mortar and digital stores, such as Wal-Mart and Target, per its website. The stock stood at $1.55 per share after its mid-May rise, up almost 480% for the year.
Cinedigm shares continue to illustrate the trajectory of hot penny stocks in late May. At $1.36, shares are down slightly from mid-May levels. Yet that price move – just $0.19 – is a drop of 14% from the mid-May high.
It also represents a nearly 3% rise from the day-prior price per share. So profits and losses would have depended on when the shares were purchased. That's true of all stocks, of course, but it is even more true of penny stocks.
So, long story short: Penny stocks (those selling at $5.00 or less) fluctuate a lot. They should be understood as highly volatile investments just because, like CIDM, a small change in the share price can move the returns up or down a large percentage. To invest in penny stocks, investors should have a strong risk tolerance and be comfortable with volatile investments.
That said, what is the best way to find penny stocks to buy for 2016?
No. 1: Stick to the Major Exchanges in Searching for Penny Stocks to Buy for 2016
One of the best methods of finding penny stocks to buy for 2016 is to narrow your search from the Pink Sheets and Over-the-Counter Bulletin Board (OTCBB) where penny stocks frequently trade to the major exchanges like the New York Stock Exchange (NYSE) and Nasdaq. Penny stocks also trade on these major exchanges.
Penny stocks have been subject to scams in the past, as unscrupulous firms promoted them heavily to naïve investors and then dumped them as soon as promoted buying had driven the stock price up. Some have been shell companies, formed largely to financially reward top management.
The reporting requirements on the major exchanges are much more stringent than the reporting requirements on the Pink Sheets or OTCBB. They lets you know more about the company and are protection against scams.
No. 2: Research When Looking for Penny Stocks to Buy for 2016
Another key way to find good penny stocks to buy for 2016 is to research the companies diligently. You need to know what the company's plans are, what its products and services are, and what its financial returns are. In this way, penny stocks are no different than other stocks: You need to know what it does and how it's doing.
In most cases, you can find this through the investment community or the company's website. You can also contact the company via phone or e-mail to get investment information.
If you cannot find information on a company, walk away no matter how interesting it looks. A good company will have financial information you can access. Being a shareholder is being a part owner. You are entitled to this information. Don't invest in anything unclear, even for pennies per share.
No. 3: The Best Penny Stocks to Buy Have Innovative Products and Strong Trends
Many penny stocks are penny stocks because they are engaged in cutting-edge research and development. In the R&D stage, they may have no earnings, but trade on expectations for future products. That's what keeps them in the micro-cap range.
When you look for penny stocks to buy for 2016, be sure to look for those with cutting-edge, innovative products. First, when the products receive good news (an FDA approval for a medical products company, for example) or start to come online for sales, it can trigger a surge in the stock price.
Second, companies with successful cutting-edge products can attract the attention of larger companies. A merger or buyout can also send the stock price nicely upward, making investors the beneficiaries.
Companies whose products ride a strong trend can also be good investments. Money Morning Chief Investment Strategist Keith Fitz-Gerald, for example, has pinpointed six Unstoppable Trends – economic, social, and cultural movements that will lead to strong markets. For 2016, they are technology, energy, demographics (the graying of the population worldwide), medicine, war, terrorism, and ugliness, and scarcity/allocation. Companies whose products are poised to benefit from these trends have the potential of being strong stocks.
One example is biotechnology company Novavax Inc. (Nasdaq: NVAX), which is a Money Morning pick for one of the top penny stocks to buy for 2016. NVAX is a developer of vaccines for illnesses such as pandemic flu viruses and rabies. It is, therefore, a likely beneficiary of the Unstoppable Trend toward global increases in spending on medical care that are estimated to range from 4% to 6%, far above the level of the gross domestic product of most countries.
The stock rose during March on reports that it is researching treatments for the Zika virus and Ebola.
Money Morning Small-Cap Investing Specialist Sid Riggs observes that a particular technology NVAX has developed for the manufacture of vaccines is just as important to future stock price moves as its vaccine treatments. Its Recombinant Nanoparticle Technology can produce vaccine treatments quicker than currently available technologies.
NVAX shares currently trade at $5.50.
No. 4: Allocate a Reasonable Portfolio Percentage
Finally, after identifying the best penny stocks to buy for 2016, remember to maintain a reasonable portfolio allocation. Highly volatile investments like penny stocks should never comprise a large (or even medium-sized) portion of an investment portfolio. Fitz-Gerald recommends that investors never allocate more than 2% of their portfolio to any one penny stock. Penny stocks overall should likewise be a small percentage of the overall portfolio.
Now, as a free bonus to penny stock investors, we have a stock that is trading in penny stock territory now, but won't stay that way. It's a small company with a breakthrough technology that has gone unnoticed by Wall Street so far – so it's undervalued. But this tech development is so big that it can revive a dying U.S. industry. Find out more about this money-doubling stock here.