I make a lot of money trading penny stocks so it’s not surprising that my friends who know this often ask me, “How do you pick a good penny stock?”
Before I answer this question for you, let me just say right up front that there are many gimmicks out there that I find simply don’t work — at least they don’t work often enough or consistently enough to bother with.
One of the biggest gimmicks in my opinion is the idea that you can make a lot of money shorting penny stocks. I strongly encourage all of my friends to completely avoid this so called “technique” as it is nothing more than a gamble and I also think it highly unethical. Those that teach this method talk about the virtues of making money off of other people’s stupid mistakes. That’s not for me. Besides, almost every one I know who has tried this method ends up losing a lot of money in the process.
So, getting back very specifically to how to pick a good penny stock, let me say that it isn’t really all that different from picking a good stock of any kind, except that you are severely limited in doing a traditional fundamental analysis because the company usually has far less capital on hand and because it can be very difficult to get information on these stocks that trade for less than $5 per share (often less than $0.50 per share!). They simply are not required to submit the same type of reports as companies whose stock trades on the big boards like the NYSE and the NASDAQ. In fact, to get all the information you need, you almost have to be a detective!
However, having said the above, there are some things you can look for to pick a really good penny stock:
First, you can look at the management teams. How experienced are they and how successful have they been. This is key to the success of any business. Specifically, you want to pay really close attention to the CEO. Look at their experience in that specific field and decide whether or not you believe they can lead this company into profitability.
Second, does the company own any technical, medical, or creative patents. Owning a patent that will give them a competitive edge could very well be key to their success as an upstart. Many people overlook this important point. Searching for patents can be tricky though I do need to warn you, especially if they are still pending.
Third, take a close look at their revenue (if you can). Are they already making money and if not how do they plan to make money? Does this look promising? How much revenue do they have on hand? Is the amount of revenue enough to get them to a point of becoming profitable. If not, how do they plan to raise more revenue. Even a company with a good management team and a great business idea won’t do well if they are under-funded!
Fourth, has the stock got a lot more upside. If the stock has already been run up, then you may really be too late to get in regardless of how good it is. Timing is essential in making a killing on a penny stock. You have to know exactly when to get in and get out. You also need to avoid the temptation to buy a penny stock that looks promising but has already been run up. This is a very common mistake I see traders make.
Fifth, you can buy premium penny stock picks. Frankly, this is what I do most of the time these days when trading penny stocks and I find it a far easier way to make money with penny stocks than trying to figure out 1-4 above myself! I have my favorite penny stock picks of course that I have tested over time and that almost always give me profitable picks. I do pay attention to the other factors I’ve listed above but it can be really hard to track down all this information so I have found it easier to let the experts do this for me. I’ve become quite loyal to the picks that do best for me.