Investors who want to make penny stocks part of their portfolio must recognize that good penny stocks to buy are difficult to find and are never a sure bet for growth-stock investors. However, here are some tips on finding the few good ones out there.
Penny stocks tend to be speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing unproven technologies or launching new software.
Some aggressive investors who aim to get into fast-growing stocks at what they describe as ‘the ground floor” are always on the hunt for good penny stocks to buy. However, if you want to find and buy the best penny stocks among those out there, then you must recognize the good and bad characteristics of these investments.
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10 characteristics of good penny stocks to buy for an aggressive portfolio
- Experienced management with a proven ability to develop and finance a mine, new product, software and so on.
- A sound balance sheet in all the penny stocks we recommend. We like to see enough cash to keep operations going without the need to take on debt.
- A record of hidden assets like real estate at historical prices or R&D.
- They trade on legitimate markets and not over-the-counter.
- They are located in areas with manageable environmental factors.
- When we recommend junior stocks exploring for minerals, we prefer those that operate in an area whose geology is similar to that of nearby producing mines.
- We look for well-financed penny stocks with no immediate need to sell shares at low prices, since that would dilute the interests of existing investors.
- We insist on political stability. For example, mineral exploration is risky enough without the threat of expropriation or onerous taxes.
- We avoid stocks trading at unsustainably high prices due to broker hype or investor mania.
- We compare the market cap of the stock with the estimated value of its mineral reserves, future product sales and so on. Some pennies need to find a mine, or successfully market a lot of their software, or other products, to justify the current share price and avoid collapse.
If you want to find good penny stocks to buy for your portfolio, follow these two risk-reducing investment tips
Avoid buying low-quality penny stocks: Buying low-quality penny stocks that don’t meet the above criteria is a mistake that many investors make. Some get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than the high-quality stocks (the kind that have a history of earnings, if not dividends) that we recommend as part of our Successful Investor philosophy.
Bypass unscrupulous penny stock promoters: Penny stock promoters love to make deals (however tenuous) with major, household-name companies. The link with a major gives them instant credibility, especially with investors who are willing to buy penny stocks.
When penny stock promoters get a deal with a major, they go to great lengths to make it seem bigger than it is.
In fact, when a penny stock shoots up on the news of big-company involvement, and the mineral property/unproven technology/revolutionary software is still in the early stages of development, it’s often a good time to sell.
Bonus Tip: Instead of looking for good penny stocks to buy, try focusing on a record of investment quality
You can put the odds in your favour by following our Successful Investor philosophy and buying well-established stocks. This puts time in your favour, too. The longer you stay invested in these kinds of stocks, the more likely you are to come out ahead.
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.
You need to be extra careful about the penny stocks you do buy and you should only open up a small portion of your portfolio to this risk. Also, with the most speculative of these stocks, only invest money you can afford to lose.
Instead of penny stocks, try looking for higher-quality investments that meet our Successful Investors criteria.
You can still look at blue chips as the strongest and most secure stocks on the market. We continue to believe that investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying blue chip stocks with strong business prospects.
The value penny stocks often slips due a lack of liquidity. In addition to gauging the spread when deciding whether or not to invest, what strategies do you rely on to select penny stocks?
If you’ve had good outcomes with penny stocks, what were the characteristics of the stock that you feel helped it succeed?