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.