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If you want to know how to make money from penny stocks, it's important to understand how to research these stocks to avoid potential scams. That's why today we're going to show you one of the easiest ways to find out if a company is safe to invest in…
Penny stock investing is popular because the shares are inexpensive and some stocks can see double- or even triple-digit gains in a short period. For example, semiconductor company MoSys Inc. (Nasdaq: MOSY) climbed from $0.66 per share to $2.30 between June 1 and June 28. That's a 248% return for investors who bought and sold on those respective dates.
But sometimes these gains can stem from penny stock scams, which have become a big problem in recent years. According to The Wall Street Journal, the U.S. Securities and Exchange Commission (SEC) – the governing body responsible for regulating the U.S. stock market – halted trading on more than 1,300 companies from 2012 to 2014 due to alleged stock fraud.
That's why we at Money Morning constantly emphasize the importance of conducting thorough penny stock research. These tiny stocks can be good investments if you use caution and understand the risks up front. Money Morning Chief Investment Strategist Keith Fitz-Gerald also advises investors to limit penny stock investing to just 2% of their total portfolio.
With all of this in mind, here's the No. 1 tip for safe penny stock investing in 2017…
How to Make Money from Penny Stocks with One Simple Tip
When searching for a safe and profitable penny stock to buy, one of the most important things to do is research the company's annual 10-K report.
The 10-K filing is a document that shows every detail of a company's financial performance over the course of a fiscal year. It summarizes everything from the firm's outstanding shares, annual earnings, and revenue, among many other details.
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But when it comes to researching penny stocks, the most important area of the 10-K is the "Executive Compensation" section, usually located under part III of the document. This section outlines how the CEO and top management are paid, whether it be in stock options or straight cash.
Investors need to be skeptical of companies whose executives are paid entirely in cash. Since they don't own their own company's stock, they don't have the same financial incentive to make sure the company is successful. But when a company's executives are paid in stock, they want to profit from that stock, just like you do.
The bottom line is that if the company's executives don't own shares of their company, then it's a good idea to stay away from it.
Although a penny stock with executives paid in options can still make you those triple-digit returns mentioned above, some investors opt for small-cap stocks instead. These stocks are often slightly more expensive than standard penny stocks, but their slightly higher share price and larger market cap indicate they're safer, since more investors trust them enough to buy them. Small-cap companies typically boast a market cap between $300 million and $2 billion.
That's where Money Morning Small-Cap Specialist Sid Riggs comes in. He's handpicked some of the biggest small-cap winners of 2017. In fact, his April 19 stock pick has already handed Money Morning readers a 42.1% profit since he recommended it.
And today, he's giving you another small-cap stock recommendation set to explode from China's booming auto market…
This is one of the fastest-growing industries in the world, with Chinese auto sales rising 45% from 2013 to 2016. That easily crushed sales growth in the United States and European Union, which only climbed 12.45% and 22.9% over the same four-year period, respectively.
Here's Sid's latest small-cap stock pick…