How Do I Find the Best Stocks?

Since penny stocks are sold and traded at such low prices (less than $1 in most cases, but some penny stocks are marked as under $5) there are a lot of misconceptions when it comes to picking them up.

A lot of people who invest in penny stocks do so with the idealistic dream of watching those 10-cent investments blossom in price by 10 times their original investment. However, there are several factors that you need to take into consideration if you hope to find the best penny stocks.

Do Not Confuse Share Price and Share Value

There is one major mistake a lot of investors make when looking for the best penny stocks to invest with, and that is confusing the price of shares and the value of the shares. While some penny stocks may seem like they are affordable, there may not be much of a benefit in purchasing thousands of shares of an inexpensive penny stock, over buying just a few shares of a stock with a slightly higher price point.

When searching for the best penny stocks you have to make sure you are getting the best bang for your investment buck. This means making sure that you do not overlook the number of shares outstanding when you are trying to strike a balance between investing $1,000 in shares of $0.10 over a firm that trades for $100.

A lot of people only look at share price as a deciding factor when looking to invest in penny stock. However, when trying to find the best possible penny stocks, you much keep the number of shares available in mind.

Watch Out for Dilution

Even when you are dealing with the best penny stocks, there are factors you need to watch out for, and one of the main ones is dilution. Thanks to company tools such as employee stock options, share issuance and stock splits that are sometimes used by companies in order to raise capital the amount of outstanding shares can skyrocket and even get out of control.

Dilution happens when a company issues shares as a way to produce more capital (which is a method a lot of smaller companies have to end up doing to stay a float.) However, when they produce a lot of shares, this can dilute the ownership percentage that is held by you, as well as other investors.

This means that, while the business may not change at all, the price of the shares can drop drastically. This means it is important to find a good penny stock company that has a strong handle on their share structure, because that means there is a much smaller chance of dilution damaging the value of your shares.

Best Way to Identify the Best Penny Stocks Today

Spotting a winner in the realm of penny stocks takes some practice, skill and a little bit of luck. However, just because a lot of the companies that trade their shares for under a dollar tend to have smaller market capitalizations, this does not mean all penny stocks fall under this category.

One of the best ways to find good penny stocks to invest in is by making sure you find out the most you can about the strengths, and fundamental elements at the core of the companies you are looking at. One of the things to look for is whether or not the company relies on issuing new shares in order to raise capital for themselves, or if the company has proven to be profitable, or shows that it will be able to turn a profit based on the way they have their business structured. Another key elements to keep in mind are whether or not the company seems to be competitive within its sector.

Those investors who are willing to do their homework when it comes to the best penny stocks, and create a list of penny stocks to watch will be able to find gems waiting to be invested in.

What Are Penny Stocks?

All penny stocks come with a degree of risk. Yes, even the best penny stock can be a risky investment opportunity for beginner investors, as well as seasoned veterans.

Penny stocks are stocks that are normally traded outside of the sanctions of the world’s major market exchanges, and are traded at relatively small stock prices, and, usually, they come with small market capitalization.

Penny stocks are known for being very speculative, as well as coming with a high degree of risk because of numerous factors that surround them. Some of these factors include a lack of liquidity, larger than normal bid-ask spreads, limited disclosure, as well as a lack of information and stock history.

These stocks are usually traded over the counter through OTC Bulletin Boards, as well as pink sheets.

Where Did Penny Stocks Come From?

The term penny stock has grown and evolved along with the market over time. While there was a time when any stock that traded for less than a dollar per share was considered a penny stock, new Securities and Exchange Commission (SEC) regulations have modified the penny stock definition to include all stock shares that are traded below the $5 range.

While the vast majority of penny stocks (including the best penny stocks) are not usually traded on the major market exchanges, there are a few cases of large companies that have shares trading below $5 while still on the main exchanges thanks to market capitalization.

This means stocks such as Curis Inc. (CRIS) – a small-scale biotech company – can have its penny stock listed on the Nasdaq. However, stocks like CRIS are not typical of a penny stock. Typically, a penny stock is indicative of a smaller company with highly speculative shares. These smaller companies are usually subjected to much more limited requirements when it comes to listing their stock, as well as much fewer filling and regulatory standards.

How are Penny Stocks Created?

Much like any other publicly traded stocks, penny stocks are created via the process of an initial public offering (IPO.) This means that in order for the penny stock to be created a company must first file a statement of registration with the SEC (though there are some situations where a company may qualify to be exempt from SEC registration.) While the company works with the SEC, it must also make sure that it meets the requirements of securities laws in the locations where they plan on selling the stock.

Once they jump through these hoops, the company may begin to solicit orders from prospective investors, and (if these choose to,) the company may apply to have their stock listed on a major exchange, or just have the stock trade on the Over-the-counter market (OTC.)

Small companies, as well as start-ups, usually issue stock as a way to start raising capital to help fund the initial growth of the company. While this process is a long, and costly one, issuing stock can also be one of the most efficient strategies for these companies to build this capital. Penny stocks tend to be the result of these capital-growing ventures, which means they can be very profitable, but also precarious.

When Does a Penny Stock Stop Being a Penny Stock?

There are a few things that can happen that would trigger a penny stock to change into a regular stock. If the company you have penny stock in issues new securities within an offering that is already registered within the SEC, or if it registers a preexisting class of securities with the proper regulatory body. These transactions result in the stock can be triggered into becoming a regular stock.

This change occurs because they then require the firm to obey periodic reporting and disclosure of business activities, financial conditions and company management to investors.