You are going on a vacation with your friends and they are talking about trading in penny stocks on the way. You felt left out as you do not know much about the subject and you do not believe in investing your hard earned money into speculative activities as are involved in investing in the best penny stocks. Then you switch on the radio on your walkman, and you find that the topic of buy penny stocks is being discussed on a particular station. You decide to give it a listening and raise the volume to get a clear understanding of what is being aired. The program starts as under:
“Picking the best penny stocks is not rocketing science or brain surgery, but it just the study of certain performance parameters of successful companies. In short, it appears complicated as it is not an exact science as the first two mentioned activities are. You will be surprised to know that a slew of cross-currents go into picking the best penny stocks. This information is not available on any website on penny stock investment and we will tell you also what the websites do not tell you. There are certain facts that are considered in the activity of picking the best penny stocks.
Recent Gains: Multiple times, we scan the NASDAQ, NYSE, AMEX, etc, and zero in on some stocks which are quoting at below $5.00, but they are recording the best percentage gains. Track them for a few days to see if they have legs and if they are moving, and if yes then what moved them.
The Balance Sheet: Pretend that picking the best penny stock is nothing short of creating the Universe. Look upon the Balance Sheet as the Big Bang, Assess the liquidity position of the company for the next one year, or are there too many liabilities in the balance sheet that cannot be covered by its assets? If you find that the balance sheet seems sound then half the work is done.
Analysts Ratings: There provide some comfort, although their opinion does not carry much weight in our eyes.
Institutional Ownership: This factor is important only for companies which are being leveraged by brokerages, in which case they will want to see the company succeed at any cost. Hence not much weightage is given to this point by us.
The Story: The Company’s business should be easy to understand and should not be rocket science. Assess the sector of the company and ascertain whether that sector is currently performing well. In case if the company is into high tech then what kind of proprietary framework do they have and the number of patents that they have filed. Recent news reports give an idea of the current activities of the company and its sector.
Target Prices: You should put target prices on all stock picks.
Your Big Question: Do not bet the house down on penny stocks. Only 10-12% of your money should go into the best penny stocks. “
