6 Questions You Need to Ask Before Investing in Penny Stocks

Penny stocks may just sound penny but can possibly land the investor in a lifetime’s fortune. The penny stocks/shares in which you invest might not be as penny in terms of their return potential as it might simply sound. Here, we shall focus on addressing the 6 questions you need to ask before investing in penny shares and further run a scanner over the best performing penny stocks on ASX.

A potential investor would consider gaining insights from the guide to penny stocks or beginners guide to penny stocks for making an informed investment in the penny stocks.

As one may be aware of, penny stocks are the stocks that have lower share price and are generally traded in lots of hundreds or thousands shares. Penny stocks carry the potential of turning a pretty small investment into a large sum of money in very less time. However, penny stocks are not a favourable option for every investor.

Let’s dig deeper into the attributes of penny stocks and demystify the possible questions that an investor can have about penny stocks.

How low can be my investment to begin trading in penny stocks?

Amount of money to start trading in penny stocks depends greatly on your broker. Try and crack a deal with a broker who fetches less money out of your pocket by approaches like minimum deposit. If you manage to bag a bargain with your broker at the minimum cost, you can start trading for penny stocks for an amount costing you nothing.

How do I find if the company is legal for a safer investment?

Checking the legality of a penny stock before investing in it is a must in your to-do list. The legality of the stock is easy to track for the stocks that are trading on ASX or any respective stock exchange. The penny stocks traded via Over-The-Counter (OTC), otherwise called as pink sheet stocks, may not comply with the regulations set by the stock trading authorities and regulatory bodies and may also lack liquidity.

Can I invest in the stock my friend just recommended me?

One of the commonly committed mistakes while investing is to put your money into a stock based on the sentiments of your peers or co-workers. We highly recommend you gather adequate information about the aspects like stock’s past and current performance, technical and fundamental analysis of the company, future opportunities, industry outlook coupled with comparative studies etc., and then make the final decision to invest. Do not forget, no one would ever care about your money more than you do.

Would I be able to earn profits while trading in penny stocks for a short time?

Why not? Being erratic is one of the main features of penny stocks. Due to high volatility and unpredictability, an investment in penny stock can do wonders for the investor. Penny stocks carry the potential of yielding returns higher than what major blue-chip stocks provide over the same interval of time to the investors.

How do I decide on the duration of my investment in penny stocks?

We would say “depends”. It is because holding penny stocks for both short-term as well as long-term can yield satisfactory returns to the investor. However, if a company which has sturdy growth prospects and has established as a progressive business can be chosen to hold on to in long-term. On the contrary, business with narrow future growth potential and less stability can be looked upon for a short-term.

Finally, ask yourself. Why am I doing this?

Taking control of your emotions and gushing hormonal flows is a very common pro-tip among the investor community. Never be influenced by the outcome of someone else’s investment in penny stocks. The highly volatile and speculative market of penny stocks carries equal chances of losing all your money in one go. The risk gets even bigger when one moves to the less regulated OTC market for trading penny stocks. Invest your hard-earned money into penny stocks only when you have a justifiable and a meaningful purpose.

Now, let's set you in motion with some of the penny stocks listed on ASX.

Fluence Corporation Limited (ASX: FLC)

Being a leader in the decentralised water, wastewater and reuse treatment markets, Fluence is engaged in setting the industry pace with its Smart Products Solutions, including Aspiral™, NIROBOX™ and SUBRE.

Fluence Corporation Limited

Smart Products Solutions, Source: Company’s Report

On a year to date basis, FLC stock has provided 50.82% return as on 13 November 2019. The stock was trading on 14 November 2019 at a price of $0.485, up by 5.435% (at AEST 1:26 PM).

For the year ended 31 December 2018, FLC announced an increase of 205% in revenue year-on-year to $101 million and significant improvement in gross margin from 18% in FY17 to 34% in FY18.

IODM Limited (ASX: IOD)

Being a leading accounts receivable and operational efficiency solution, IODM Limited is powered by technology to offer a customisable application that seamlessly works with any accounting and ERP software package.

In the past three months, IOD stock has provided 185.71% return as on 13 November 2019. The stock was trading flat on 14 November 2019 at a price of $0.200 (at AEST 1:36 PM).

IODM has recently entered into a reciprocal referral arrangement with Western Union Company that will initially focus on the APAC and UK regions with the potential for further expansion into other global regions. IODM is focused on accelerating the agreement with the expectation of traction being gained in the back half of 3QFY20.

Cogstate Limited (ASX: CGS)

Being a leading science and technology solutions provider, Cogstate Limited is dedicated to optimising the measurement of cognition in clinical trials, academic research and healthcare.

CGS stock has provided 21.10% return in the past one month, as on 13 November 2019. The stock was noted trading flat at a price of $ 0.360 as on 14 November 2019 (at AEST 1:40 PM).

CGS recently completed the retail component of the Entitlement Offer (a fully underwritten 1 for 10 accelerated pro-rata non-renounceable entitlement offer of new shares to raise approximately $4 million) successfully.

Cogstate has scheduled the settlement of the Retail Entitlement Offer to be held on 14 November 2019, and new shares are expected to be issued on 15 November 2019 and commence trading on the ASX on 18 November 2019.

Karoon Energy Ltd (ASX: KAR)

Headquartered in Melbourne, Karoon Energy is an international company engaged in oil and gas exploration with a view to gain high equity interests in early-stage exploration opportunities with large potential targets.

KAR stock has provided 24.61% return in the past six months, as on 13 November 2019. On 14 November 2019, KAR stock was noted trading at a price of $ 1.082, down by 1.636 % (at AEST 1:42 PM).

Recently, Karoon executed a binding sale and purchase agreement to acquire a 100% operating interest in Concession BM-S-40 for a headline acquisition price of US$665 million with an effective date of 1 January 2019. Karoon’s cash balance stands at $256 million as on 30 September 2019.

The above-discussed penny stocks have a double-figure rate of return over different periods of time. Investing in penny stocks with sound knowledge about the potential stock and pros and cons of investing in penny stocks can help the investor gain lucrative returns.


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