Penny stocks are simply any stocks that are sold for less than five dollars a share. They are a high risk but potentially high reward alternative investment to traditional stock trading.
Since the shares of each penny stock are so low, they generally are for smaller companies. This is why you have a high risk of losing your investment, but also have potential for a higher return should that business succeed.
You can minimize the risk you make with penny stock investing by knowing the basic fundamentals to look for in a company. That’s what we’re going to discuss now.
Here are the top three things to look for in a winning penny stock:
Look At The Data Of The Company
The very first thing you should do when you find a stock you are interested in investing in will be to overview the data of that company.
The best place to look at company data will be on one of the secured exchanges, such as the NYSE or the NASDAQ. Here you can overview the SEC filings, financial statements, and other financial information concerning the historical performance of the company.
Look Into The Cash Flow Of The Company
The second thing to look for in a potentially rewarding penny stock is the cash flow of the company. Assuming that the company has plenty of financial data that looks to be positive, you now need to analyze how the company is spending its money.
For example, is the company borrowing more money to pay off debts, or is it spending money on operational expenses and investing more money to grow in the future?
The spending patterns of a company are a clear signal on whether the business is likely to grow or shrink in the future. In other words, it’s a clear sign of whether the risks will outweigh the rewards by investing in the company, or vice versa.
Look At The Balance Sheet Of The Company
Finally, closely analyze the balance sheet of the company. The balance sheet is simply a list of the assets and the liabilities of the company.
Examples of assets include money, receivables (money that is owed to them by customers), real estate, property, and liquid investments. Examples of liabilities include debt and equity that is retained by owners.
Never, under any circumstances, invest in a company where their liabilities are greater than their assets. By looking at the balance sheet of a company, you will be able to quickly gauge whether they have enough assets to pay off the liabilities it owes over the next year. If they do have enough assets, you should consider investing in them.
Choosing A Winning Penny Stock
Most penny stock trading amateurs will invest in companies without paying attention to the underlying fundamentals that were just covered. Choosing a penny stock company that will give you greater rewards over greater risk will require you to look into the details of that company before actual investing your money.