There are perhaps thousands of penny stocks that are bought in sold in various exchanges across the world. With so many choices, it might seem overwhelming to know which stocks you should consider and which ones you should run away from as fast as possible. One way to make better investment decisions is to read the penny stock newsletters given free by some companies as you just might find some gems and powerful methods that you can apply.
Know The Companies That You Buy
If you are going to buy shares of a company it is in your best interests to learn everything you can about the company and the industry that it is in. Does the company have a competitive advantage? Who are the competitors and how strong are they? How good is the management team and do they seem committed for the long run or do they have a history of bailing out of previously failed companies?
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Understanding the various risk factors that a company is subject to is one of the most important skills to learn to be a wildly successful investor.
These are all factors to consider when deciding to invest in a company. There are certainly some industries that would seem to be better investment candidates than others. A startup company that promoted horse drawn carriages as an energy efficient alternative to public transportation might not have the same investment potential as one that is starting to build electric buses with new batteries that are 250% more efficient than current technology. It is up to the investor to determine what industries and sectors offer the best chance of growth and then focus exclusively on those areas.
Some other things to consider are whether or not the company has a single supplier. If so there might be a substantial risk that the company could go out of business if the supplier cuts them off or they have some contract or pricing dispute. The supplier could have a single location that is prone to natural disasters like earthquakes or flooding.
Look At The Big Picture
The recent Fukushima earthquake and nuclear plant disaster in Japan disrupted electronic component deliveries to several manufacturers in Tokyo and throughout the world, causing major shortages and production slowdowns across several manufacturing industries.
The same concern is valid for a company’s customers. If a company has only one major customer it might be a point of investor concern. What if the customer decides not to renew a contract or switches to another company? An investor must evaluate the risk of something like that happening. For larger companies this is probably not too important, but it could be something that can make or break a small penny stock company.
There are many things to consider when evaluating the risks associated with a company. The more an investor knows about which business model the company is using, future plans and assumptions, and the general direction that the industry is headed the better prepared he or she will be to make informed decisions.
The ability to think outside the box and see different possibilities and scenarios are the difference that can make an investor stand out from the crowd.
Monitor The Price And Volume Action
When viewed on a long-term chart, most stocks meander in a fairly predictable trading range most of the time. It is always a good sign if the trading range is trending upwards, indicating that the share price is appreciating over time. Volumes are also generally steady and somewhat constant.
The volume and price may fluctuate up or down due to the broader market activity. For example, if the NASDAQ or the S&P 500 markets experience a massive selloff due to a bank failure or a terrorist act - it is safe to say that most prices in the penny stock universe will experience some selloff and a drop in prices also.
However, if an investor sees a sharp increase or decrease in volume without any movement in share price it will be important to find out why. Although prices are usually contained within a range, there are often brief periods that see abnormal price movements (in either direction). It is these movements that can create the impetus for explosive gains (or losses) in a company.
After one of these abnormal price movements the stock prices usually settles back into a trading range and will stay there until the next big movement. It is absolutely a necessity to find out what the underlying factors are when you see price or volume movements that you don’t understand.
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Become A Corporate Customer
One of the easiest ways to evaluate a company without looking through price and volume data is simply to become a customer. If the company produces something that you can use - try it out. For example - if a company makes a wearable band that tracks your heart rate then buy one and try it out. Does it work as advertised? Determine if it well made or cheaply made.
Find some reason to call customer service to ask them about the product and see how the interaction is. If the customer service is poor or the representative is rude or unhelpful then this might raise a red flag.
Many penny stock companies overlook the importance of their customer service division and it can have disastrous results. The Internet gives almost instant visibility to both praise and complaints and a complaint made by a powerful Internet user or anyone with a large following might cost a small company brand damage as well as monetary damage from people not utilizing their services.
A recent poll showed that people on the Internet now place just as much weight on a product review as they do from a personal opinion given by a friend or acquaintance! Collecting information with this method can let an investor create their own free penny stock list.
Become An Industry Sector Customer
If an investor is evaluating a company that makes wearable heart rate monitors, why not become an expert and evaluate several of the top companies that make them? Expanding on the above example, an investor could purchase several wearable heart rate monitors and learn as much as possible about each of the companies. Armed with this knowledge a better understanding of the risks and potential might be more clearly understood.
A comparison could be made of the different features and benefits of several products could be made from personal experience. This would allow an investor to have a much better idea if a company that he or she was interested in was a viable investment choice.
This will also give deeper insight into other risks. Do a few manufacturers provide components to several competitors? This may either weaken or strengthen the position of a smaller penny stock company.
If it is not possible for an investor to purchase the product that a company makes, it is still possible to do similar research by evaluating customer reviews or industry reports on the positives and negatives of a product. Industry analysts along with corporate and university researchers often test out and provide clear unbiased information on new products and technologies presented in new product releases.
Learning Is A Continuous Process
We have discussed 4 major activities that an investor can be involved in to evaluate whether or not to invest hard earned money into a penny stock. However, there are many other variables that can be evaluated. The key is to find the activities that you feel most comfortable with and that give you the best feeling about moving forward with a penny stock purchase.
Over time an investor can develop their own unique methodology and be able to evaluate companies quite quickly just due to the accumulation of experience and knowledge.
We will definitely cover some more strategies, decision-making methods and research techniques in future posts of this free penny stock newsletter - so stay tuned!