To many investors, penny stocks can seem both exotic and confusing. People who are comfortable trading shares of a large-cap mega corporations find themselves hesitant when it comes to determining the best penny or micro-cap stocks. And because of the confusion, often investors see the penny stock market as a bit of a financial Wild West. But penny stocks are really nothing but companies with low-cost, low cap stock prices. The price of penny stocks can be more volatile than larger cap companies. But that also means that there is more potential upside if you do your homework and choose your investments wisely.
The Security and Exchange Commission defines a penny stock as one that is selling for under $5 a share, although the vast majority of them sell for under $1. There are a couple of ways to buy penny stocks. You can use a live broker or buy and sell them directly through an online broker such as E-Trade or TD Ameritrade. The online brokers are often a better choice, since you can easily do things such set automatic sell or buy orders. And when it comes to buying and selling penny stocks, the process is a bit more complicated than it is if you’re dealing in shares of Microsoft or Starbucks.
Penny stocks aren’t traded on NASDAQ or a national stock exchange. Instead, they’re traded directly between individuals via a electronic or telephone trading system. Two of the major systems are the OTC Bulletin Board (OTCBB) or its competitor the OTC Markets Group. One is automated and one is not, but in both cases, quotes are issued for the stock with a buy and/or sell price and if the suggested price is accepted, then the deal is completed.
Why Are A Company’s Shares Being Sold Over-The-Counter?
There are a couple of common reasons a company stock might be listed in the over-the-counter market. The first isn’t able to meet the initial listing requirements to appear on one of the major exchanges. In that case, the penny stock market is a way for the company to raise money and test interest in anticipation of an eventual move up the financial food chain. The second reason a stock is part of the OTC market is that the stock has been delisted from the NYSE or another major market.
That could be due to a move into bankruptcy or some other disruption to the company that affects its longterm viability. While being delisted sounds terrible, it can also make for a solid investing opportunity, if the company has corrected the problems and is poised to turn things around. The trick is to spend enough time coldly examining the mid-term and long-term plans to see if they make sense and will lead to an increased revenue stream.
How Do You Invest In Penny Stocks?
In both cases, the factors to use in determining which which penny stocks to invest in are basically the same. You’re looking for companies that have solid management and a steady revenue stream. Is the company selling shares just to raise money to help it continue its poor decisions? Or is the money earmarked to improve the current revenue stream and increase the value of company?
Answering those questions helps you determine if these potentially volatile penny stocks are worth purchasing. Don’t get caught up in the company’s romantic story-line of what they promise they’ll do. Do you think that they can actually accomplish what they’ve promised? that’s the difference between a money-loser and a company poised for profitable turnaround.
So once you’ve bought the penny stock, how long do you hold on to it? Generally speaking, it pays to only keep the stocks for a short period, in order to take advantage of any upturn in the share price. Determining the best point to sell does require watching the company closely to follow market fluctuations.
Like their bigger brothers in the stock market, the factors that make the price of penny shares rise and fall gets down to market potential and execution. If the company isn’t moving in the direction you believe is best for the share price, it’s time to move on. Conversely, if the company moves in a positive direction, sell off the shares, take the profit and move on to the next money-making opportunity?
Four Penny Stocks To Watch
So what are good penny stocks to watch? Here are four suggestions:
- Miller Energy Resources Inc. (NYSE: MILL) is a Knoxville, Tenn. oil production and exploration company that focuses on oil and gas wells in the central and southern Alaska. Shares of the company were at $1.27 at the beginning of 2015 and are now over $3.00 a share. Alaska is a hot part of the world’s burgeoning energy market and MILL is located right in the middle of the excitement.
- Genetic Technologies Ltd. (Nasda ADR: GENE) is an Australian-based biotech company that has introduced a new line of genetic tests for various cancers, ranging from breast and ovarian to prostate cancer. Shares of the company was at $0.40 at the beginning of 2015 and is currently over $4.00.
- Lake Shore Gold (LSG) is a mining company that is on a hot streak, despite the recent slump in gold prices. The company’s portfolio of holdings is diversified beyond just gold and that has helped the company grow revenue steadily over the past year. The company has more than $400 million in revenues and in recent statements the company’s execs have said they expect revenue to increase substantially over the next several years. In a volatile part of the market, LSG is a rare success story.
- Halcon Resources (HC) is a drilling and exploration company with revenues of over $1 billion a year. The biggest upside for investors is the large amount of undeveloped acreage owned by the company. Even at a very conservative estimates, the land is worth much more than its book value. The stock is currently close to its 52-week high and continues to climb.
Do penny stocks work? Investing in penny stocks can be very profitable, but like any type of stock investment, it requires due diligence and patience. Making money with penny stocks is a very satisfying experience, especially if it’s the result of doing a bit of careful research.