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George Mitchell

How to choose a penny stock wisely

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There is no question but that you can be highly successful at penny stock investing if you choose your stocks wisely. Obviously, you are not going to be successful 100% of the time because penny stocks can be both higher risk and volatile but there are some things that you might care to keep in mind:

  • The stocks that you are purchasing are issued by companies that are small and not high-profile. As such, these companies are not easily recognized.
  • Penny stock companies have no track record to speak of (good or bad or otherwise) so this is not a factor that you can take into consideration.
  • They may not have a lot of tangible assets to speak of or even a stable existing business.
  • It is hard to forecast the future performance of these companies because there is so little information available.
  • Your broker may be working against you instead of for you.

Despite all the problems, penny stocks still have a dedicated following of investors. This is because they are a cheap way of investing in a company that could have an outstanding future. Are you going to give up the chance to get in on the ground floor in the next company that has the potential to become Apple? Are you going to give up the opportunity to acquire a sizeable quantity of stock without emptying your pocket? These are the considerations that keep investors coming back to the penny stock table.

Pay some attention to the share structure of the penny stock company in which you propose to invest. This means studying the pattern of ownership and how the shares are distributed between the various shareholders. Let us study the importance of this aspect. Let us assume that you have acquired a substantial number of shares in a penny stock company without studying the structure and subsequently find that another shareholder has millions of shares held through an offshore account.

If this shareholder happens to be a stock manipulator, it is likely that he will sell as soon as you buy to take advantage of the price rise caused by your purchase. In due course, the value of your holding is going to drop sharply because of the correction in the market. You are left with a substantial loss. Even if the price does hold, you may not be able to find buyers for you stock because they will consider the stock too pricey and too risky. You should therefore avoid buying penny stocks where you are at the mercy of a single shareholder or a small group of shareholders.

You can always improve the odds in your favor if you invest in a company where the stock holding is widely spread and there is a lower chance of manipulation by stockholders acting in concert. You should also aim at collecting as much information as possible on the company even though this may not be easy. After all, if you are unlikely to hand out a few thousand dollars to a stranger who confronts you in the park, why shouldn’t you apply the same standard to a penny stock investment?