Making Wise Penny Stock Choices

 Now that you have a good understanding of what penny stocks actually are as well as how they affect you, it is time to consider how you can make wise decisions when investing in them. 

The good news is that you can learn to make money, big money, with penny stocks.  The question is; do you have what it takes to do that successfully each time?

In most cases, you will not make a profit every time you invest in penny stocks.  They are volatile and can be something of a huge risk in most situations.  Why is this?

There are a number of different reasons.

1. The companies that you are purchasing penny stocks from are generally low key companies without big names attached to them for easy recognition.

2. The companies do not have a track record, good or bad, for you to take into consideration with.

3. They usually do not have a lot of inventory or equipment or in some cases a definite market.

4. It is hard to predict the future of any of these penny stock companies in an accurate manner.

5. You need to find a stock broker that is working with you not against you.

As you can see, there are many things to take into consideration when it comes to investing in penny stocks.  Yet, even with all of that said, people still flock to them.  Why is that?

It is simple.  They are affordable ways to invest in stocks in a virtually unknown company.  Will this company that is just starting out be the next Wal-Mart?  Will this company that is just getting into the game be the next big company with all kinds of potential?  That ‘what if’ statement is what leads many to the table along with the ability to invest heavily without forking over a ton of money.

So, now it is your turn.  How well will you do in finding solutions for penny stock investing?  To help you, the next sections will cover some of the important decision making factors you need to keep in mind when it comes to penny stock investing.

Share Structure

The share structure of the penny stock you are considering purchasing in one of the key factors that you should consider when doing so.  This is just how the shares of the stock are distributed throughout the share holders.  Now, you may not realize why this is important, until it turns around and hits you.  Consider this scenario.

You decide that the penny stock looks good to purchase.  So, you go ahead and purchase a good amount of it.  It turns out that there are millions of shares of that stock being held by one share holder in an off shore account.  The problem with this is what is likely to happen now that you purchased the shares. 

You see, if they are not the best of people, as soon as your investing into the penny stock happens, they sell off their stocks.

Why would they do this? It is quite simply because the value of the stock has now gone up.  Although there is only two holders of the stock, it is likely that they will decide to sell their shares of the stock and, in the end, your stock value drops a considerable amount.  In the end, they have sold the stock and now you are left with something that is not worth nearly as much as it looked like it did in the beginning.

Now, you decide that you would like to turn around and share your stocks.  The problem is that the stock prices have rises to the level that makes them too costly with too much risk involved.  In the end, you realize that you are stuck with a stock that is not selling.  You simply are unlikely to be able to sell it for a profit.

To avoid this problem with penny stock investing, do your homework.  Find out what the share structure of the stock is.  You will see quickly how this helps you to make good decisions.

• Avoid penny stocks that have a limited share stock in just a few individuals, especially those that are just in one stock holder’s account offshore.

• Second, make sure that the penny stock has a large number of stock holders and that the stock is more spread out.  That can help to insure you get the best price for your penny stock all around.  Penny stocks should not be single shareholders.

When you take the share structure into account, you are sure to see the benefits that are offered or the risks that play into the stock.  You should be able to easily find this information out as well.

The Penny Stock Investing Company

When it comes to penny stock investing, learning about the company will provide you with the most ideal methods to making the right decision regarding the company itself.  If you can take some time to do your homework, in other words, you are likely to find benefits along the way in the penny stock.

That is, learning more about the company that you are potentially investing in just makes good sense, right?  Would you pour in thousands of dollars to just anyone that came up to you on the street and requested money for their new business?  Not likely.  For that same reason, you should know as much as you can about the company you are potentially purchasing stock to support.

Here’s the bottom line.  This company has not been traded, most likely, on the stock market.  Therefore, it is not well known.  On top of that, as you will learn later, there are plenty of opportunities for people to take advantage of those that are looking to invest in penny stocks. 

With that said, the bottom line is that if you want to invest in penny stocks, you need to spend some time doing your own research to develop your own plan to make money with them.

One of the largest problems with penny stock investing is the fact that you are dealing with a relatively unknown company.  But, that does not mean that you should not deal with them because no one knows about them.  What happens if you pass them by and they become the next Microsoft some how in the future? 

The good news is that there are a few easy and effective ways to learn more about a company by just doing a bit of investigating into them.

Here are some key things that you need to do before investing in any penny stock company.

Pick up the phone and call the company.  This is a great easy way to learn about the company in the most ideal way possible.  That is first person.  Here’s what you will want to do.

• Get the company’s name, phone number and/or their address from the broker that is selling them.  No need to provide any other information or tell them what you are up to. 

• Call the company at the number given.

• If you can not get a hold of anyone, find out if there are alternate phone numbers available about the company itself.  You can even search for the company name online to learn if it is in fact there and viable.

• If you can not find anything out about the company then you may want to take into consideration a different penny stock.  Wouldn’t any good company want to be contacted in order to actually do more business?

Now, calling the company is good, but what should you say if in fact you do get in touch with them?  It is simple, you can simply say that you have heard about the company and would like to know a little about them.  What do they do, where they are located as well as what their client base is like?  Any decent company will be more than willing to provide this information to you, right?

But, what happens now?  Do you want to simply stop there?  Is that enough information for you about the company?  Not yet it is not.  You also want to know if the company is real and not just someone on the other line to answer just in case an investor calls.

To do this, take into account how the phone is answered.  Did they answer with a simple, “Hello” as if it was a home?  You can find out if a phone number is a residential line as well.  If you are in fact connected with someone’s home, most of the time this is a scam and you should not want to invest in it.  Definitely consider looking elsewhere for a penny stock to invest in.

You can also track down the company in terms of how good it is in other ways.  For example, if you are investing in a company that sells coffee, why not consider pretending you are the customer here. 

• Where can you find the coffee?

• What type of reputation does the company have with such things as the Better Business Bureau? 

• Does the company have a good health department report? 

• Are there other factors that play a role in how well this business can do?

In other words if you are the customer looking to purchase a product of any type from this company, what would you get from them?  Why ask this question?  It is simple.  If they do not have good customer relations, how well will your stock actually go up?  Again, we ask, “would you give your money to just anyone on the street that asked for it?”

So, what is the bottom line here?  It’s quite simple.  If you can not verify that the penny stock company is really a company, avoid them at all costs.  All businesses that are real and true companies are more than willing to talk to customers as well as investors. 

Of course, if you do get a hold of them, you do want to take some time to insure you are talking with someone that is actually capable of providing information such as the manager or owner of the business.

Learn About the Stock

After you take the time to thoroughly look at the company’s reality, it is next important to take a look at the stock itself.  You may not realize it but there is no doubt that these stocks are very risky business and may or may not show you some details of that risk right in the track record it has left behind for you.

In other words, most stocks can tell a history just in what they can provide for you by what they have done in the past.

No matter what type of investing you are doing, penny stocks or other securities, you want to learn about the stock as much as possible.  Otherwise, how would you make the right decision with that stock?  This can be completely meaningless.  The company could do exceedingly well right off the bat.  Yet, that does not mean that it is likely to be that way.

Why do this?  Some companies are not legitimate and you are likely to come across a few that are anything but good investment opportunities.  By doing this bit of investing, you can really learn about them and find out if in fact they are a potential problem or perhaps if they are an excellent gold mine as well.

What is it that you are looking for in the stock?  There are several key things, actually.  First, do you notice that there are many reverse splits in the stocks?  This can be a sign of trouble with the stock.  Another thing to be worrisome about is when you see several mergers with the stocks.  This can mean some trouble for the company itself. 

The bottom line is that most of the time, the stock’s history will begin to repeat itself. 

That means that if a stock is somewhat troublesome in the past, it is likely to be the same or worse in the future.  Most of the time penny stocks can be traced back quite a way.  This allows you to do the homework that you need to in order to learn more about the company in general. 

The bottom line is this.

• Look at the history of the penny stock.

• Determine if the penny stock has had too many reverse splits in its recent and somewhat distant future.

• Determine if the penny stock has had several worrisome reverse mergers as well.  This too can be traced back a bit to learn about the true trends.

• Analyze the risk that you believe is involved with this stock based on the facts that you find.

• If a stock has quite a few reverse splits or has had several reverse mergers, you may want to consider looking at a different penny stock or realize the risk involved.

The good news is that it will not necessarily take you a long time to find the answers to these specific questions.  What’s more is that you will likely find solutions to your questions within a matter of minutes and be able to cross off your list any possible problematic penny stocks that you may have been considering. 

Take some time to determine the stocks history.  It is well worth the investment in time.  Doing these things can help you to find answers where you need them.  It can also help you to learn what you need to know:  the real level of risk that plays into penny stocks.  The good news is that with a bit of time and research, you can find all sorts of answers to your questions regarding penny stocks.

In the next chapters, you will find some additional warnings to help you to insure that you know exactly what you are getting into.