A lot of people wonder which penny stocks they should invest in for long term growth. As there are literally thousands of penny stocks, it is very difficult to determine which have the best growth prospects.
First, let me explain that not all penny stocks are created equally. You need to sort the “wheat from the chaff” because the penny stock industry is plagued with shady and corrupt practices. Many of the penny stock companies, typically listed on the Pink Sheets or Over-the-Counter Bulletin Board (OTCBB), are created for no other reason than for its owners to use deceitful stock promotion tactics in order to sell shares for profit. These companies usually have no actual business and no prospect of generating any revenues in the future.
However, there are many legitimate growth penny stock picks to invest in. Examples of companies that were once considered penny stocks include Green Mountain Coffee Roasters Inc (NASDAQ:GMCR), Netflix Inc (NASDAQ:NFLX), and even Apple (NASDAQ:NFLX) once traded below $4. There are hundreds of more examples of stocks that once traded below $1 and are now trading above $10 and listed on major exchanges.
So, how do we know which companies are legitimate and offer the best growth opportunities?
First, you should run a scan of stocks using multiple criteria. This could be stocks that are currently trading under a certain dollar amount, stocks with a market capitalization under a particular threshold, or those that have a price-earnings ratio under a particular value. All of these indicators will help identify a potentially undervalued stock.
Next, look at the industry. Look for stocks in growth industries. This changes over time, but today for example, growth industries might include mining companies (particularly in commodities like gold, silver, molybdenum, rare earth metals), commodities such as coffee and battery technology companies that might grow with the increasing demand for longer life batteries in electric vehicles and more powerful consumer electronics such as smart phones.
Once you have narrowed down the industry, you must complete due diligence on individual companies. Read through the company’s SEC filings and annual reports to determine their business operations, growth plans, current profitability, financial health and ability to raise finance in order to expand. Also, a solid management team is critical to a company’s success.
You can also call the company directly and ask to speak with senior management or the CEO. Ask them about their growth plans, financial situation and anything else you need to have comfort in your potential investment. You will be surprised how accessible these individuals can be in smaller companies.
Finally you could consult or subscribe to an investing or penny stock newsletter for an additional source of information. There are some very reputable ones out there, such as Shiznit Stocks, but be careful all are certainly not created equal.
Stock liquidity, or lack thereof, is not necessarily a bad thing. Just because there is a lack of trading volume does not mean you should shy away from investing. Often times it simply reflects the fact that there is no media coverage on this particular company, they lack an investor relations function, or maybe sophisticated investors have not yet discovered the company and its growth potential.
Once you have narrowed down the field of penny stocks that have a realistic potential for growth, you should then apply sound risk management rules to your investing.
Invest small amounts at regular intervals, rather than one large sum. Dollar cost averaging, whilst frowned upon in some circles, is often a good way for the average investor to accumulate shares in a company at a reasonable overall cost.
If circumstances change with the company or its industry, don’t be afraid to admit the investment is no longer considered a growth opportunity and reduce your position accordingly. Often times, taking a loss is the best decision you can make.
On the flip side, if you start seeing real progress and growth in the company, look to acquire more shares if the stock price is going up.
Penny stocks have the potential to offer tremendous growth opportunities that large cap stocks simply cannot. If you complete your due diligence and apply sound risk management to your investing, you can really super charge your portfolio with these investments.