Penny stocks are appealing because they are inexpensive, trading for $5 or less. However, they can also be very volatile and risky, so an individual should not invest in them without first doing some research. The best penny stocks represent stable companies with a good financial standing.
Some stocks are priced in the penny range because the company is in financial trouble. The stock may once have traded with a respectable volume and at a higher price. Whether due to mismanagement or unsuccessful products or services, the company fell into a financial slump and may never again realize decent earnings.
Investors should stay away from those and instead focus on penny stocks of companies that have good growth potential. If the company has not sold any products or services, its financial statements may not be very positive. A potential investor should still review them for other red flags such as over-leveraging. The company should have a large amount of available capital and a great business idea.
When investing in penny stocks, individuals should also review the company goals and learn about the management team. Are the vision, mission, and short-term goals of the company in line with the investor’s core values and do they seem attainable? Do the individuals running the show have a wealth of experience with other companies in the industry or are they fresh out of business school? That is not to say that a recent graduate cannot hit it big, it is just not likely.
There is money to be made in penny stocks but investors must approach them with caution. They tend to move up and down in greater spreads and present more risk than do stocks in well-established companies. Doing some research into the companies offering penny stocks can pay off in the end.