The key to how to find good penny stocks to buy today is knowing what you are buying and if it fits your needs.

The first thing you want to do as a penny stock investor is figure out how much money you have to work with. Basically, don’t invest anything you can’t afford to lose.
We typically recommend no more than about 2% of your portfolio in one penny stock.

There are some great buys in penny stocks and there are penny stocks where scammers pump and dump. The first step is to avoid the scammers or over-hyped stocks of the day.

Problems with Penny Stocks

In order to invest wisely you need accurate and timely information on which to make decisions. You should be trading stocks in a liquid market that lets you enter and exit positions when you want. Investopedia offers their take on penny stocks and lists four factors that should give investors concern.

• Lack of Information Available to the Public
• No Minimum Standards
• Lack of History
• Poor Liquidity

True penny stocks do not trade on major stock exchanges. They trade via pink sheet on over-the-counter markets. These stocks are not required to file info with the Securities and Exchange Commission so you access to accurate and timely information is nil. And new penny stocks have no history. The stock may have a great story but the company and its management have no performance history for you to consider. And because these stocks trade thinly you may have trouble getting in and out of the stock at the prices you want.

Past Performance as a Predictor

We looked at an article in The Street from 2011. They described the 10 Best-Performing Stocks under $5 for that year. Check out the article for all picks. We only list the ones that are still in business and trading for more today than in 2011; info is from Google Finance.

#10, Radio One, ROIAK

This stock’s top price in 2011 was $2 a share. It peaked above $5 at the start of 2014 and trades at $2.63 a share today. It does not pay a dividend.

#7 Authentidate Holding, ADAT

The stock was trading at about $1 a share in 2011 and the highest it was until just recently was $1.82 a share in late 2014. Interestingly the stock jumped from $0.50 a share to $5.38 a share in the first days of January of 2016 and has been falling ever since, now trading at $2.60 a share.

#6 USA Technologies, USAT

This one has a bit of growth. Having traded around $2 in 2011 the stock dipped to $1 a share in early 2012 and has grown to the $4.00 to $4.50 a share range this year.

So, do penny stocks work? One might say that for the vast majority, once a penny stock always a penny stock. Many penny stocks go out of business. The only semi-impressive stock in this list is #6. You can see how penny stocks get hyped when they have a good year. People buy at that point only to see the company go out or business, steadily lose money, or at best grow a little. The only stock in this list that did as well as the S&P 500 in the last five years was USAT.

Do Penny Stocks Work? PPT

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 3M for $86.20 a share of Google for $595.47 a share. Penny stocks are often companies that are starting up and have a 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.

Beware of penny stocks. If you have unique insight into the company you may know something that stock analysts do not. This can be very profitable. If you do not have any special insight into the stock you may be in for a rude awakening when the stock that sold for pennies now is out of business. We are not the only ones to advise investors to beware of penny stocks.

Price per Share versus P/E Ratio

USA Today writes about penny stocks.

Beginning investors are often attracted to penny stocks thinking the low per-share price means they’re cheap. But this thinking is misguided. Keep in mind the per-share price by itself doesn’t tell you much about a stock. It’s the per-share price compared with the company’s profit, revenue or cash flow that tells you if the stock is actually cheap or not. Some penny stocks could be the most overvalued stocks you can buy – if the company’s profits are evaporating, the company loses money or has poor prospects. Penny stocks are also prime targets for scammers. Their low per-share prices make them easy targets to be manipulated. They are also at risk of being delisted from the exchanges. Most online brokers allow you to buy penny stocks, but most charge added surcharges. Only 15 stocks in the Russell 3000 trade for less than $1 a share. Avoid those.

Share price compared to profit is the price to earnings ratio (P/E ratio). A high P/E ratio indicates that the stock is expensive and a low P/E ratio indicates that it is cheap. In our recent article about the risk of higher interest rates we note that blue chip stocks are being bid up and more risky stocks, such as penny stocks, are being bid down as investors flee to quality. Beware of penny stocks at a time when interest rates and thus the cost of doing business are going to go up and putting pressure on weak companies. Always remember that there is a reason why a stock sells for pennies and that reason may simply be that the stock shows very little promise of long term success.

Beware of Penny Stocks PPT