How to find the best penny stocks to buy

Reviewed: June 25, 2014
By FinanceWeb

In the 1990’s, penny stocks were making headlines for all of the wrong reasons. Some misguided underwriters created a scandal involving penny stocks that caused investors to lose a lot of money. Prior to that scandal, penny stocks were rarely talked about outside of investor circles. But when those stories hit, everyone wanted to find the hot penny stocks to buy.

Penny stocks, when treated properly, are actually not bad ways to get involved in the investing game. A penny stock is any security that is sold for a price of less than $5 per share for companies that usually have a lot less operating capital than companies on the bigger markets. If you have a limited budget but you want to make your splash in the investment world, then penny stocks are something you should look into. But there are some things you should know first.

The Risks Of Penny Stocks

Let’s get the risks on the table right away to try and help wash away any fears you may have. The problems experienced in the 1990’s were isolated incidents and not typical of the penny stock trading experience.

The biggest risk in penny stocks is that they are largely unregulated. That means that you really need to do you homework and find a legitimate stock that you can invest in with confidence. They are out there; you just need to find them.

The other risk with penny stocks is that it can be hard to find professional advice you can really rely on to make a trade. Since penny stocks are not on the regular markets, they are usually not part of the financial news being discussed by experts. Once again, doing your homework should help you to make a smart trade.

Set A Budget

Before you go looking for penny stocks, you should set a budget that you are comfortable with. It is always best to start out small in penny stocks and build your way up to a higher level of comfort. The less you invest in your first few tries with penny stocks, the less money you will lose. Until you understand how penny stocks work, you should always limit your exposure to loss.

OTCBB And Pink Sheets

You will find penny stocks on the over-the-counter bulletin board for the National Association of Securities Dealers. This is a service that has some regulation to it, but there really is no way of protecting yourself from a bad deal.

The Pink Sheets are actual pink pieces of paper printed by companies and offered as securities either online or over the phone. There is no SEC regulation for the pink sheets, which makes them risky. But if you find the right pink sheet investment, you can make a decent profit.

Set Up Your Broker Account

The best way to maximize your profits with penny stocks is to set up an account with a no-frills brokerage service that offers plenty of research resources, but does not take a large commission. You will find that most of the reputable online brokerage firms fit this bill very nicely and give you access to all of the penny stocks available.

Research, Research, Research

The reason people deal in penny stocks is that it allows you a chance to find that next great company without spending a fortune. But if you want to find that winner, you will have to do your research.

While there is no regulation on penny stocks, you can still find information out about each company if you look online. There are services you can use which will give you insight into public and private companies.

When you are buying penny stocks, you want to look for a company that shows a history of stable earnings. When you are looking for hot penny stocks to buy, the company’s reputation is about the only reassurance you will have that your dividends will get paid.

Give It A Try

It is important to understand that penny stocks represent a huge financial risk on your part. If your portfolio is filled with penny stocks, then a small adjustment in price could wipe out everything you have invested. But penny stocks are still significantly less expensive than regular securities, and they do offer a tremendous opportunity to the people who take the time to do their homework.

The best thing that can happen in a penny stock deal is you find that next great company that you can ride all the way to big profits. Investing is always a risk, so why not take the biggest risk and enjoy the biggest reward? There is nothing illegal about penny stocks; so give them a try and stake your financial claim to the next big thing.