It is my intent to discover the formula for investing in penny stocks that goes beyond the hype currently being used. What criteria do you use?
I read 10k statements and look at a company's return and dividend history. I also look at whether or not they are a growing company (increased revenue and profit) or if they are a failing or concept level company (no revenue or profit).
There is no formula or hype to choosing a good penny stock. There are good ones but they are like any other stocks; you want to choose companies that are financially solid and make profits.
It is extremely difficult to determine the value of penny stocks. Many don't have any value at all, and are simply frauds from the beginning. But if you must take the risk........
I would start by looking at the book value of the company and quality of the reported assets that make up the book value. For example, Do they have Cash and Liquid assets or is it made up of intellectual property which can be subjectively valued and is not necessarily liquid (easily converted to cash)? Also what are their liabilities in comparison to assets? Are they in debt up to their ears?
Also what are the liabilities to you the shareholder? By this I mean, are they printing stock like the Fed prints money to stay afloat? Do they have agreements with management and select shareholders to allow for share dilutions to take place in the future?
Also look at sales and profit. Are they profitable? Are revenues going up or down? By how much? You obviously want profits, cash flow, and revenue to be making progress.
Lastly do thorough research on the company and their services or product being offered and the background of their management. Talk to people that have actually used the products and services. Use them yourself. This will be a good way to uncover frauds right away. It will also give you an idea of the potential for the particular penny stock as a long-term investment.
I would probably say that penny stocks are better for trading short term, but if you are going to invest long-term I would follow the above approach closely.
Hope this helps!
Generally you will have to know Accounting to be able to understand the figures in the balance sheets. If stock companies do not publish them, then you should not invest at all. Generally also be cautious dealing witth pink sheets such as OTC stocks.
Well but there are few penny stocks, often from Asia, that are real companies in the start up process. It sometimes isnecessary to read what they are trying to do and maybe also to contact them in order to see if they know what they are talking about or if they are only dreamer.
Neverheless I would not advise to invest much in one stock alone, does not matter if pennystock or bluechip. You will always need a diversified portfolio if wish to achieve long term profits.
If you just want to gamble then better go to a casino.
Thank youfor your well thought out answer. It is very much appreciated and great to remember when we invest in stocks.
The hype is the biggest factor with penny stocks. Any volume of buying or selling is going to affect the price rapidly. If you find one that you think is truly a solid investment it's true value will take much longer to firmly establish itself with a penny stock. If you have yet to learn how to evaluate stocks I suggest you start with ones from the major indexes as they are much less volatile and easier to grasp. Penny stocks are not actually any cheaper and have a much greater chance of reaching zero making them potentially much more expensive.
I've invested in several penny stocks. AHR, GNW, FNMA, and FMCC.
AHR was a loss. I was relying on the reported book value per share, which was overstated. I should have sold earlier, as the company was letting their debt default and that should have been an indication that the book value was overstated.
I bought GNW at $1.59. I also relied on the reported P/B ratio which was about .25 at the time. In this case, Genworth was actually making their debt payments and communicating with investors.
I currently own 36,000 shares of Freddie Mac preferred stock. These shares were delisted in July 2010. I don't recommend buying the common stock of these companies, but I do believe that they have unrecorded tax assets, which could be recognized before the government exits their position. In the case of Freddie Mac, the amount is $32.9 billion. This number can be found in the Notes to the 10Q. If the government allows private shareholders to retain 20.1% of the company, then junior preferred shareholders should get about 40% of par value from these tax assets.
If you are going to invest in penny stocks, do your due diligence.
Indeed just as some of the people who have posted replies noted, if they do not have any published reports do not buy. Yet many if not thousands of investors can tell you they have made alot of money trading pennystocks, its a gamble just like any other type of stock. The important thing is to make the decision to buy what ever you want buy yourself, there is alot to learn from your gains, failures and losses. Sign up to http://www.schaeffersresearch.com/ and get some enlightenment.
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