The best penny stocks can be found, but you should approach them with a healthy dose of skepticism.
It’s essential to avoid letting an investment opinion turn into a fixed idea about the future value of an investment. Instead, keep an open mind. Nobody can consistently predict what stocks will do. You should always look on your opinions as tentative and subject to continual review, in light of any new information that comes along.
This is particularly true with speculative investments like penny stocks
Here are five tips to use to find the best penny stocks for your portfolio.
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Tip #1: The best penny stocks are unlikely to be in the limelight.
Penny stock promoters love to make deals—however minor or indirect—with major, well-known firms. These deals are aimed at gaining the trust of investors. For example, a penny stock may issue a press release about how Sony, Apple or some other household-name multinational has agreed to sign them up as a “channel partner” to potentially co-market a computer program or electronic gadget. The penny stock hopes that the link with a major brand will give them instant credibility, even if it far from guarantees any sales or profits. Not all penny stocks and their promoters are out to cheat investors. But it’s important to approach any penny stock with a healthy dose of skepticism.
Tip #2: You can make money with the best penny stocks by only selecting ones that are reasonably well-financed, have solid balance sheets, and have strong management.
Penny stocks have appeal for some aggressive investors who aim to get into fast-growing stocks at what they describe as “the ground floor.” They think the best way to profit in stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors. We simply don’t recommend using this path when investing in penny stocks. Far better to buy those with sound finances, plus sound balance sheets and management.
There’s a delicate balance between risk and reward with tech penny stocks, but fast-changing technology can offer big opportunities in these stocks. That doesn’t mean they come without risk, though. Tech penny stocks may start out with a promising business plan, but they need all sorts of things to prosper in the long run. Companies must have the right employees, adequate financing, the right merger partner, a favourable economic and regulatory climate, and favourable competitive situations and research outcomes.
Tip #4: Even the best penny stocks are risky, so only use a small portion of your portfolio investing in them.
Some investors look to penny stocks as a quick way to boost their investment gains. But while buying penny stocks can lead to a big payday when you make the right choice, the odds against your success are high. Penny stocks are almost always involved in riskier ventures, such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software. Even if you want to take on that risk, you need to be extra careful about the penny stocks you do buy and you should only open a small portion of your portfolio up to this risk—and with the most speculative stocks, only invest money you can afford to lose.
Tip #5: The price of penny stocks will rise and fall regularly.
In general, penny stocks have lower trading volumes or liquidity, and this lack of liquidity means it may be more difficult to sell a stock when you want to. They also suffer from large price fluctuations, so any bit of news will cause a penny stock’s price to rise or fall precipitously.
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