Finding promising penny stocks takes research, diligence, and knowing what to look for. While penny stocks are risky investments due to their speculative nature, the returns can be massive if you pick the right ones early. This guide will walk you through tips for researching and identifying penny stocks that have high growth potential before they take off.
Table of contents
- What are Penny Stocks?
- Finding the Right Penny Stocks
- Best Places to Find Penny Stocks
- Evaluating Fundamentals of Penny Stocks
- Best Practices for Investing in Penny Stocks
What are Penny Stocks?
Penny stocks refer to very small public companies that have low-priced shares trading under $5. They are riskier investments compared to more established companies due to having smaller market caps, less financial reporting, and more volatility.
However, the upside of investing in penny stocks is that even a small increase in share price could lead to doubling or tripling your money. For companies with strong fundamentals poised for growth, penny stocks offer an opportunity for tremendous returns if identified early on.
Finding the Right Penny Stocks
There are over 5,000 penny stocks trading. Sifting through all of them to find hidden gems primed to erupt is challenging.
Here is what to look for when researching penny stocks:
Examine the company’s financials and evaluate metrics like revenue growth, profits, cash flow, and debt load. Look for penny stocks showing accelerating financial growth or turning profitable. Strong and improved financials indicate a company with long-term viability.
The quality of the executive team matters in leading a young small-cap company to the next level. Look for management with extensive industry experience or leadership from major companies. Check if directors and advisors have strong business and finance backgrounds.
Look for imminent catalysts that could propel growth and send shares surging, like a major product launch, partnership announcement, FDA approval, discovery of valuable resources, or other transformative events. Time your investment to take a position before the catalyst occurs.
Technical Trading Trends
Analyze the price and volume action of the stock over the past few months. Identify ones carving out a technical base showing increased accumulation or ones beginning to break out above key resistance levels to signal institutional buying.
Best Places to Find Penny Stocks
Focus your research on hunting for penny stocks on sites and platforms that provide comprehensive data and tools for analysis:
- Penny Stock Screener Sites – Screen for penny stocks using filters like price, volume, percentage changes, technical indicators, events, filings, and more. Stock screeners help narrow down the full universe quickly to a shortlist to research further.
- Microcap Stock Message Boards – Scan popular penny stock chat rooms and message boards frequented by retail traders. Look for tips about upcoming catalysts or penny stocks showing increased chatter or spikes in volume.
- Investor Relations Websites – Review penny stock company websites focusing on their investor relations pages detailing financials, leadership teams, company presentations, events calendar, and press releases.
- Trading Platforms – Use penny stock trading platforms providing detailed quote data, charts, level 2 data, and news sentiment indicators to analyze price action and trading signals.
Evaluating Fundamentals of Penny Stocks
Once you identify penny stocks to consider from screening tools or other research, conduct in-depth due diligence by:
Researching Products and Services
Understand what products or technologies the company sells and the value proposition they provide customers. Evaluate if they are positioned for sustainable long-term growth in an expanding niche.
Checking SEC Filings
Read all financial filings released for detailed and accurate financial data. Many stocks trade over the counter, so they may not file with the SEC but check SEDAR filings in Canada and other disclosure statements.
Reading Market News and Reports
Search credible business news sites for reports and articles on the company. Seek insightful analysis and opinions from financial bloggers, penny stock experts, and investors covering the specific company.
Analyzing Chart Patterns
Review multi-year weekly and monthly charts for overall trends and key technical levels. Analyze volume surges, support levels on pullbacks, or breakouts above long-term downtrends.
By taking the time to thoroughly research each penny stock and understanding all aspects of the company, you will have the knowledge to determine if a penny stock has the underlying strength and growth prospects to skyrocket in value potentially.
Best Practices for Investing in Penny Stocks
Penny stocks carry substantial risk, so utilize these best practices to help manage risk:
- Start small – Only allocate 1-5% of your portfolio to penny stock trading until you prove your strategy works.
- Use limit orders – Use limit orders rather than market orders when buying to control the entry price rather than buying at any price.
- Set stop losses – Use stop market or stop limit orders to protect profits and limit downside risk if share prices retreat.
- Diversify across many penny stocks – Build a basket portfolio with small positions spread across at least 8-10 penny stocks rather than betting on 1 or 2.
- Book profits when they hit ambitious targets – Have a profit target where you take at least some partial profits, such as 25-50% of your position, rather than relying on unlimited upside.
While penny stocks carry more risk than other securities, they offer a short path to generate lofty returns rapidly if you hone your research process for picking those poised to gain momentum. Use comprehensive digital tools, evaluate company fundamentals, study price trends, and diversify across a basket to capitalize on the explosive penny stock.
Should I find penny stock by screening tools or stock message boards?
Use a combination of screening sites to systematically filter thousands of penny stock down to a watchlist and mine penny stock chat rooms, Twitter, and message boards for hidden gems, seeing a spike in chatter or volume from retail traders.
What percentage of my portfolio should I allocate to penny stock?
Given the risky nature of penny stock, limit your position size to 1-5% of your overall portfolio capital when starting out. Only allocate more once you have proven success trading penny stock profitably over many months.
How long should I hold penny stock trades?
Penny stock tend to be short-term trading opportunities to capitalize on near-term catalysts or technical breakouts. Typically, hold a penny stock trade from a few weeks to a maximum of a few months. Book partial profits along the way rather than relying on unlimited upside.