Penny stocks provide an opportunity for investors to make high risk high reward investments in low cost stocks. It is part art and part intuition for many successful penny stock investors who use their analytic insights to find undervalued stocks among poorly capitalized or underrated issues. Capitalization is a key ingredient and most penny stock companies have low liquidity. Low capital can restrict the market for the stock. Many penny stocks are companies that fell during a phase in the economy such as the fracking boom and later oil price drop.
Defining Penny Stocks
They are stocks issued by issuers with credit and capital problems that limit the market for their stock. By price, the SEC defines penny stocks as those under five dollars per share. Others sources consider three dollars per share. A more reliable indicator are low or micro capital stocks traded over the counter or by pink sheets at about five dollars per share or less.
How to Pick Penny stocks
There a large numbers of penny stocks on the market at any point in time. The method for selecting them varies by investor, but some elements stand out as applicable to nearly any situation to maximize the chances for success. Try to find out as much information about the company as possible including upcoming business or business trends. Try to buy penny stocks that have a high volume of daily trades. Try to buy penny stocks that have reached or about to reach annual highs or price and volume.
Five Best Penny Stocks to Buy
Some Penny stocks fit the bill of companies with growth potential, rising stock prices, and a substantial trading volume. Described in summary below, these reflect some successful approaches to buying penny stocks.
• Cowen Group, Inc. (NASDAQ/COWN)- Cashing in on financial sector growth, this investment and banking services firm shows growth potential and substantial assets under management.
• Eagle Rock Energy Partners L.P. (NASDAQ:EROC) – An oil and energy company that like many others piled on debt in the deal that oil would always rise. The company has resolved some of the debt issues and will grow as the sluggish oil market grows and stabilizes.
• Five Star Quality Care Inc. (NYSE/FVE) – It operates more than 260 senior care facilities and is poised to move with the growth of retiring Baby Boomers. They have a potential for thriving in the growth of the nation’s health care delivery system.
• Halcon Resources Corp. (NYSE:HK)- One of the fracking boom companies that used debt to finance rapid growth. It has restructured and sits in a good position to move with the price of oil and general health of the oil sector.
• Zix Corporation (NASDAQ/ZIXI)- Meeting a need in government and the healthcare sector, Zix provides high security encrypted messaging services. With a chance to expand into widening markets it has grown to slightly over $5.00 per share but still rates as a penny stock traded on over the counter markets.
Volatility and Price
High trading volume acts as a hedge against volatility and manipulation. Because of relatively low levels of regulation, persons in certain positions can manipulate penny stocks. Some common forms of manipulation include promotions by stockholders seeking to inflate the value of their shares, inflated reports by sellers and brokers that cause temporary upsurges in sales and prices. High volume trading makes it more difficult to boost the price of the stock by manipulation. High volume indicates a large number of active buyers for the stock which will provide a market for the shares should one decide to sell to cut losses or risks. Many experts advise buying at or near yearly highs to get the best chance of buying and selling at a profit.
It is important to consider the costs of trading penny stocks. At one cent per share, one can by 5,000 shares for $50. But some brokers charge $50 per transaction and that can discourage some investors, particularly those operating on small cash parameters. The features of broker fees include mandatory minimum amount in account, fees per trade, and surcharges for volume above a particular number of shares. Some brokers like Charles Schwab charge flat fees of about $8.50 per trade.
If the selected penny stocks rise and create a profit margin then it is important to remember how volatile and risky they are. Penny stocks are far more vulnerable to rapid falls and manipulation than widely traded stocks. It is important to take profits and realize the gains. A stronger cash position will enable pursuit of more rising penny stocks.