Penny Stocks to Buy

"Penny Stocks – How to Pick Winners and Avoid the Duds"

by: Max Gordon of Xtremepicks.com

It’s no wonder that there is so much interest in penny stocks; besides being affordable they can turn into very profitable investments. There is nothing like buying a stock for 18 cents and watching it rise to over two dollars or more. There’s nothing worse however, than seeing that same stock become absolutely worthless. Just because the shares of a company are cheap doesn’t mean they are of good value, and likewise, a high-priced stock can turn into a really good investment. The trick is in knowing how to spot potential winners, and how to avoid the deadbeat penny stocks.

Defining Penny Stocks

In order to understand when a penny stock is priced high or low, it is necessary to define exactly what is considered to be a penny stock in this article. Many investors consider any share priced at below $5 to qualify as a penny stock, and for arguments sake we’ll use that level as the relevant description. Other investors consider shares below $3 a penny stock, others below a dollar, but some shares valued at below a dollar can be worth much more than that market price. Likewise, just because a stock costs three dollars or more, doesn’t necessarily disqualify it as a low-cap share, the true worth of a share lies in its intrinsic value.

Let’s look at a few examples to help understand that principle. Take the case of a popular online flower ordering company. In October of 2007, the stock was trading at around $12 per share. Normally that wouldn’t constitute a stock as a penny stock, but the company was in trouble; its intrinsic value was actually less than that of its share price, and within eighteen months that stock was trading for only $1.20. It hasn’t, at the time of writing, recovered anywhere near its previous value, and is currently trading at about $2.40. Even though that stock was priced well above penny stock levels, it has since turned out to be just that - a penny stock dud.

On the contrary, take the case of China Green Agriculture, a company involved in the research and development of fertilizers and other agricultural products in China. Its shares were selling for a meager $2.13 in November of 2008, and by March of 2009 were worth close to $18. Investors had increase their investment nine-fold within 6 months, as research would have shown a sound infrastructure and a company well poised for growth.

The Quest for Low-Priced Penny Stocks to Buy

Every investor knows that the formula for making money with investments is to buy low and sell high. It’s not a mere cliché, but a tried and tested equation that is really simple mathematics; and one that can be very profitable when applied to penny stocks. However one must consider more than just the price of the shares, as if a company’s profits are falling, they have a negative net worth, or the product or service they are vending is outdated, a low-priced stock could actually turn out to be quite expensive. If that company has healthy assets, little or no debt, and a market ripe for its product, however, you have found yourself a potential winner.

Learn the Difference Between Simply Low-Priced and Good Value Penny Stocks

A method many traders use to identify low-priced penny stocks with good value is to seek out stocks that have recently gone down in price. Usually they search shares whose price has plummeted by between 30% and 50% from previously set 52 week highs. Others look for shares that have fallen by that rate, but have since risen by 10% or more from those lows, thus catching a penny stock on the rise. New investment in a company reflects confidence in the shares, and this can be a good time to get in.
You can also look at historical charts for whichever penny stocks you may be interested in. Analyzing a company’s five year chart can show you whether or not it has fallen in value before, and what happened at that time. If it has fallen several times without rebounding much, you might want to leave it alone. If however you notice a trend of serious gains after each fall, you may wish to throw in your lot.

Once you’ve found a low-priced stock to invest in, you need to keep monitoring it, and be patient as well. It usually takes time for stocks to recover, and set yourself a limit, or stop loss, where you will bail if the trend reverses. If you choose well however, you could latch on to a bargain that could see you on the road to financial freedom.