How to Invest in Penny Stocks

November 15, 2010 Investing, Investing/Trading, Penny Stocks, Profitable Investing Tips, Stock Investing

For the beginning investor with a small amount of capital penny stocks can seem attractive. They wonder how to invest in penny stocks. Before looking at how to invest in penny stocks let’s see what we are talking about. These are stocks that typically sell for less than $5 a share ($1 by some definitions) and, thus, allow the investor to buy a block of shares for less than if buying a 3M for $86.20 a share or Google for $595.47 a share. Penny stocks are often companies that are starting up and have net worth in the millions instead of billions. Because few if any stock analysts follow penny stocks they can be sleepers with a large degree of hidden value. How to invest in stocks, in general, is to know the fundamentals of the stock. This can be difficult with penny stocks. Thus penny stocks can be traps into which the unsuspecting investor might fall.

InsiderFinance: Level the Playing Field

A new stock selling in the penny stock category will typically have no track record. Because there is little or no information and opinion available on the stock it’s price will be prone to manipulation. A scam artist can buy shares at 4 cents a piece and manage to float publicity in the business section of a news paper or online. Then, when the price jumps up to maybe 25 cents a share, the scam artist sells and the company resumes its rightful position at 2 cents a share of simply goes out of business. Learning how to invest takes time and patience. There is nothing at all wrong with investing in paper for a period of time to see how your stock picks would have turned out. In doing so one often finds that the 3M’s and Google’s go up in price and many of the penny stocks fall off the face of the earth. How to invest in penny stocks is often not to, with one exception.

The key to successful stock investing is information. How to invest in penny stocks is to find the information that you need. The rap against penny stocks is that information is scarce and sometimes inaccurate. But, what if you know something useful about the company, its products, or its markets? For example, you are a fisherman and you discover a new lure, rod and reel, or fiberglass boat that exceeds expectations and is selling at a very attractive price. You check it out and find that Catch a Fish Company, in your state, makes this product. You drive by their factory and see that they are adding on to their production space. You go to the front office and inquire. It turns out that they are hiring too because they can’t keep up with the demand for their product. You are now a dozen steps ahead of the analysts in New York, Chicago, and elsewhere. You ask about buying their stock and receive a handful of financial reports which are audited by a major accounting firm and show a large bank balance and no debt. You call a stock broker and check out how to buy the stock over the counter before it goes up in price and gets listed on the NYSE. Here in our example you have done your fundamental analysis all in one step. This is an example of how to invest in penny stocks; go out and find the information that you cannot find online or from a broker.