Penny Stock Brokers 4u

Someone once asked me how to tell the difference between a good wine and a bad wine – my response, if you like it, it is a good wine; if you do not like it, then it is a bad wine. I answered that way because it is irrelevant what some wine rating system gives to a wine; if you do not care for it then it makes no difference if it is rated 99 and if you fall in love with a 70 rating, well, who really cares?

Unfortunately, it is not as easy to answer the question, “What is the difference between good penny stocks and bad penny stocks?” Obviously from a financial position, the good ones are the ones that make you a profit and the more profit the better. But, how does one know how to pick the ones that will do that? That is where experience and market knowledge become important. While a wine sommelier knows to look at a wine’s clarity, tannins, color, aroma and many other attributes when rating a wine, so must the penny stock investor know how to rate a penny stock.

So, what are the attributes of good penny stocks? Let us take a look at a few traits:

• High Consistent Trading Volume – Any stock’s trading volume tells you how much the stock is being bought and sold. Just as a used car that sits on a sales lot for an extended period indicates it is a poor purchase, so it goes with penny stocks as low trading volume is indicative that most savvy investors are passing it over. If you do buy it and hope to sell it someday then you need to understand that you may never find a buyer for it, and just like that unsellable car, it becomes worthless. You must also recognize that a trading volume spikes may not indicate a true interest in the shares as it may be the result of insider trading or a couple of investors working together to give the impression of a strong stock so they can reel in an unsuspecting buyer.
• Price Range – Look at the historical prices of the shares to see how they have been progressing. In some industries you may notice a bounce related to seasons, holidays, or other contributing factors that you may be able to take advantage of. At the very least, recognizing these may help you to buy at the best time. Another thing to notice is where the price is going – is it rising or dropping steadily? Any drastic price changes should be investigated to determine what has caused them as price should never be the sole indicator you use to determine the validity of a stock decision. For example, say you see a stock that has a 52-week range of $1 to $5 and was trading at $4.50 a month ago and has dropped to $2.50. At first glance you may rationalize that they have the potential of going back to $5 and doubling your investment. However, that drop may have been the result of being delisted or filing for bankruptcy protection, in which case the stock is probably going to continue dropping and may even become worthless.
• Financial Statements – Unfortunately, many penny stock companies do not post financial statements since they are not traded on exchanges that require them. But, if you can get them either on a financial website or on the company’s website, then review them carefully. Obviously you cannot be sure all is well with a company based on financials (consider Enron!) but a shaky financial statement may keep you from making a mistake. Also consider the industry of the penny stock because start-up companies often show a loss for a few years before getting off the ground but if their balance sheet indicates a strong capital base to withstand the losses, they are still worth looking at. For example, an oil or gold exploration company will need to put in quite a bit of expense in property, equipment and labor to locate their product, but once found become quite profitable – but on the flip side, they may go out of business if they run out of money looking, so you still must weigh the risks.
• Market Depth – Although there may be more to be made from the new kid on the block, that is where the most risk lies. A company that has been around a bit and gained some experience and thus some respect with investors and stock brokers will carry less risk because they have shown they are planning to be around. While not a guarantee, of course, looking for some market depth will enable the penny stock investor to at least weed out the fly by night scams that unfortunately pepper the penny stock market.
• Industry – Demand comes and goes within an entire industry and being able to recognize those “hot” choices may help considerably. A few years ago we heard very little about nanotechnology or green companies, yet now they are in the limelight. We saw a huge jump regarding ethanol production not that long ago yet some companies involved in it have dropped off considerably. Perhaps an alternate fuel to emerge next is algae. A commodity that seems to be growing at the moment is gold although it is anyone’s guess whether gold currently at $1,200 per ounce can climb to double that or fall back to earlier prices. While demand remains higher than the current rates of supply being brought up from the ground, the existence of a great deal still in stock does make some leery.

As with any investment, the only way to minimize your risk is to do your homework. Properly executed due diligence is especially critical with penny stocks due to their severe volatility and the unfortunate existence of scams. An investor should proceed with caution and only invest that portion