The lure of penny stock investing is obvious: Buy at a cheap price, and sell shortly after to net huge profits as the price soars. With very little capital, it's possible to make triple-digit profits trading penny stocks.
But penny stock investing isn't that simple...
As attractive as this sounds, penny stock investing is not a clear-cut road to wealth. The truth is, trading penny stocks is a very risky game that could cause you to lose your entire investment.
So before you start looking for the best penny stocks today, be sure to consider the following tips for investing in penny stocks...
Penny Stock Investing Tip No. 1: Identify Industries on an Uptrend
Investing in industries that are experiencing an uptrend will give you a better chance at profiting from penny stocks. The reason is simple: Most companies rise in price with the sector as a whole. Penny stocks often see an even greater rise than the segment in general because they are a cheap way to ride the trend.
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You can quickly and easily identify current strong industries by checking out current news and stock reports. Healthcare and technology are great industries to start with. An aging population is pushing healthcare stocks up, while new and exciting developments in virtual reality and chat bots is drawing attention to the technology sector.
Once you identify which industries to target, the next step is analyzing individual companies within that industry...
Penny Stock Investing Tip No. 2: Investigate the Company's Financial Health
Even with penny stocks, it is important to invest in solid companies with credible financial histories that support any potential gains in the short term.
Look over the company's 10-K, which is an annual summary of the business's financial performance required by the U.S. Securities and Exchange Commission (SEC). Make sure the company's revenue has been trending up each year over the past few years before you buy.
After you check out the company's financials, learn more about the CEO of the company. Find out his or her business background and if these executives actually own stock options. If they're just being paid in cash they may not have faith in their own company. If that's the case there is no reason that you should have faith in that company either.
When you see a penny stock on a strong upward trend, beware of this scheme...
Penny Stock Investing Tip No. 3: Be Wary of "Pump-and-Dump" Schemes
If you are getting a "hot tip" from someone you don't know, be cautious. These are often associated with "pump-and-dump" schemes, which is a type of stock fraud whereby a stock price is inflated by promoting false statements in an effort to sell at a higher price.
These scams can be advertised in a number of ways, including via email, phone, or traditional mail. The goal of the scheme is to increase the demand and trading volume of the stock so the person can sell their holding quickly and for a large profit.
This type of scheme usually works better on exchanges with less oversight, which brings us to our next tip...
Penny Stock Investing Tip No. 4: Stick to Major Indexes
Many penny stocks are traded on the Over-the-Counter Bulletin Board (OTCBB) or pink sheets. These indexes don't require the same level of financial reporting that's required on major indexes like the Nasdaq or NYSE. This makes it impossible for traders to verify the legitimacy of the companies. This is part of what makes penny stock investing very risky.
Focus on major indexes when scanning for the best penny stocks in order to cut down on your risk. While you might have a lot less to choose from, you'll minimize the chances of being scammed into a stock that's going to fall shortly after you buy it.
Another place to look for penny stocks to invest in is...
Penny Stock Investing Tip No. 5: Look for New Products Ready to Hit the Market
Penny stocks that involve a highly anticipated product that's about to emerge can bring about great gains. This is one of the best penny stock investing strategies to help traders realize a massive return on investment.
The new product can be as varied as the latest medication for treating a devastating disease to an electronic gadget that techies are waiting to pounce on. These products can be the impetus needed to make a cheap penny stock soar.
Penny Stock Investing Takeaway: The most important part of profiting with penny stocks is to do your homework. The hype can sometimes send you in the right direction but it should never be relied on to make your investing decisions, even with penny stocks. Those who profit from investing in penny stocks know they are investing in solid companies with the revenue to back the expected rise in stock price.
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