The popularity of trading stocks as a way to invest has increased nowadays. It because the profit is promising, even it can give those profit in short time. But, it costs quite a number of money to buy those stocks. This makes trading penny stocks even more popular. Instead of buying high priced stocks from big company, trading on penny stocks, which is usually stocks of small or start-up company, is preferable.
What are penny stocks? Penny stocks or some called micro or small caps are stocks that priced under $5 per share. But, it is rarely found on major stock exchange since penny stocks are traded on OTC or Over the Counter. Buying small company stocks means the price of it depends on the company development, so Ii is riskier than trading normal stocks. So, even it is cheaper and may provide quicker profits, the study and research before buying it must be done. Even sometimes it is harder than researching the normal stocks company. Below are tips on how to research penny stocks.
Investigate the company
It is the fundamental analysis of researching penny stocks. Every detail of the company must be taken as consideration before buying its stocks. The common thing like debts, management, contracts, profits and revenues must be searched. The combination of those can be made as analysis on the stability of the company, either it will guarantee profits or even it will lead into bankruptcy. Besides those, when you seeing stocks sale on market, there are parameters that should be taken as consideration. They are float, volume and news. These things will quickly give you an image on how profitable the stocks are
Float is how many shares that currently available to be traded. The parameter is when a stock has only few shares available, then it means it has interests and its price is likely to go up. While volume is how many trades or transaction that made of certain stocks in certain period of time. If it has high volume then lots of traders are interesting in it that makes this stock worth. News is also important to be followed. Some news about the company can affect the price of its stocks, like the new CEO appointing or new product releases. to ease their job, traders usually use scanners to find stocks that fulfilled their criteria. They just input the parameters and the scanners will narrow down the list into what the traders want.
Consider the financial ratios
Actually this is part of investigating the company but it is too important to become as one point on how to research penny stocks. The financial ratios can show the risk and projected profits of a company, which is important for the stock’s price.
Financial ratios to be considered are liquidity, leverage, performance and valuation ratios. Liquidity and leverage ratios are pretty similar when they are focusing on how the company will face the debt.
These ratios will show the capability of a company paying the debt which makes it the sustainability parameter of a company. While the performance ratios and valuation ratios are focused on the profits the company made and the price of its stocks. Comparing these ratios will make you invest to a better company.
Read and predict the stock chart patterns
This is the technical analysis and one of ways on how to research penny stocks. Reading the stock charts is basic ability that traders must learn it no matter what. The charts is contains the movement and speed of price change of a stock.
Trading a penny stock is a little different than normal stock when the volatility is good thing. The ups and downs are important to show that the company stocks are moving, meaning it has activities and the stocks is likely has interests. If the charts is slowly moving or even slowly trending down, then this kind of stocks that must be avoided to buy. But if it is stable when the others are fluctuating or in the middle of some economy crisis, then it is highly recommended since it means they can weather the economic condition and pressure.