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Penny stocks can provide explosive returns in a short amount of time, making them great ways to make money in 2017 for certain investors.
For example, shares of semiconductor company MoSys Inc. (Nasdaq: MOSY) have soared 156.1%, from $0.82 on June 6 to $2.10 today (June 28). That's a huge 156.1% profit in just three weeks of time.
The 3 Best Strategies for Trading Penny Stocks Today
However, finding these winners is easier said than done. Investors wanting to know how to separate the good penny stocks from the bad ones should make sure they're only buying stocks trading on major exchanges. These primarily include exchanges like the New York Stock Exchange (NYSE) or Nasdaq.
Stocks that trade on over-the-counter (OTC) markets or with pink sheets don't always have to disclose financial documents to the U.S. Securities and Exchange Commission (SEC). This can allow some companies to rip off investors or engage in fraudulent activity.
To help you navigate the risky penny stock sector, here are two more tips for finding the safest companies to invest in…
How to Safely Invest in Penny Stocks, Tip No. 1: Look for Cash Compensation
One thing investors should avoid doing is investing in penny stocks that don't have the full support of the company's own management. In other words, if the company executives have little faith in the future performance of the stock, you probably shouldn't either.
The best way to determine whether or not management is invested in the company is by seeing how they are paid. Take a look at the company's latest 10-K filing, which is their annual report that summarizes financial performance. This report will also tell you something about the firm's executives and their compensation structure.
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If company executives are paid mostly in cash instead of in stock options, consider this a red flag. This could be an indicator that management is trying to get as much income as possible out of the company before its stock price plummets and the firm is forced into bankruptcy.
How to Safely Invest in Penny Stocks, Tip No. 2: Avoid Aggressively Promoted Companies
A clear sign that a penny stock is trying to scam you is when it self-promotes, which is often part of a pump-and-dump scam.
You see, the goal of these companies is to artificially inflate – or pump up – their stock price. They do this by enlisting unscrupulous promotion firms to heavily advertise their stock to unwitting investors through brochures, emails, and other methods. Once enough investors bite and the stock price is inflated, company insiders will sell off – or dump – all of their shares for massive profits, which causes the stock price to plummet and leaves investors with massive losses.
Pump-and-dump schemes come in many different forms. For example, someone might drop a ticker symbol on social media just to "ask" what other people think about the stock. This has the effect of putting hundreds, if not thousands, of new eyes on a stock.
Stock pumpers might also call or send text messages with a "hot stock tip" intended for someone else so that it appears as if you are receiving an accidental message from a wrong number. This usually isn't the case.
If you're looking for a smaller company to invest in that's both safe and profitable, Money Morning Small-Cap Specialist Sid Riggs consistently recommends the best small-cap stocks to buy. For example, one of his picks – Mitek Systems Inc. (Nasdaq: MITK) – has climbed 22.1% since he first recommended it in April.
Today, Sid has another stock pick for you that has crushed analyst expectations over the last year and could continue to do so this year. This firm has beat earnings estimates by an average of 57.6% over the last four quarters – a strong sign that this stock is undervalued right now.
Here's one of the best small-cap stocks to invest in right now…