Finding smart penny stocks to invest in can lead to a big payday when you make the right choice—but the odds against your success are high
In penny stocks or games of chance, the odds are against you. So, time works against you. The longer or more often you play, the likelier you are to lose.
Meanwhile, 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 even smart penny stocks to invest in to rise or fall precipitously.
Are Penny Stocks Worth It?
Learn everything you need to know in 'Canada's Penny Stock Guide' for FREE from The Successful Investor.
Canadian Penny Stock Guide: Find where to find Penny Stocks that pay well.
Beware of stock promotions even if they seem like smart penny stocks to invest in
You should be aware that many penny stocks are little more than very well executed marketing campaigns. Penny stock promoters will do anything in their power to get their penny stock noticed. These extensive marketing campaigns include emails, TV interviews, podcasts, newsletters and paid sponsorships.
There are also some so-called news sites that will sell sponsorships to penny stock promoters. These are great opportunities for penny stock promoters but bad for investors looking for an unbiased opinion on a stock.
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. 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.
Recognize that smart penny stocks to invest in will have the following traits
Look for a solid balance sheet when investing in penny stocks. High-quality penny stocks should have reasonably sound balance sheets with moderate debt. It’s even better if they have a major partner who can provide the financing needed to bring the penny stock’s product to market or its mine into production.
Focus on up-and-coming technologies. To do this, you need to know how technology is changing. For instance, the immense popularity of wireless devices, such as the iPhone and tablet computers, has stepped up demand for faster, more reliable wireless networks as well as related computer chips. At the same time, the pandemic has led to a shortage.
Buy multi-product tech penny stock companies. Technological advances come in spurts, and they leapfrog each other. Focus on investing in tech penny stocks that have some existing or soon-to-be-released products, and avoid one-hit wonders.
Look for earnings or cash flow. A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.
Use our sell-half rule when investing in aggressive stocks, even if they seem like smart penny stocks to invest in and will keep climbing
The odds are against you when you invest in aggressive stocks and companies that are not yet making money. Some if not many of these companies will never make any money.
Our “sell-half” says that if you own a stock and you have doubled your money in it, you should sell half—so you get back your initial stake. By recovering your initial stake, you’ll be able to think more clearly about the stock.
However, the sell-half rule applies mainly to stocks we rate as speculative. Every case is different, but generally you should hold on to high-quality stocks even if they have doubled in price.
Use only a small portion of your portfolio for investing if you find smart penny stocks to invest in—especially the most speculative of 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.
At TSI Network, we recommend using our three-part Successful Investor philosophy for any stocks you buy, including penny stocks:
Invest mainly in well-established, dividend-paying companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Penny stock fraud can net millions of dollars for the perpetrators. Have you ever seen a penny stock fraud develop? How do you avoid such situations?
Have you invested in penny stocks? Did they make money for you?
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