Three Things To Look At When Evaluating Penny Stocks

Stock Price- Penny stocks are the stocks that trade at a low price generally below $1. Most frequently, these stocks are used for intraday trading as they are highly risky, unreliable and have steep price movements.

While in trading in penny stocks, investors have the leverage to take a significant position as they can buy bulk shares at a marginally low price. So, with any rise in stock price, the investor gets to make a good profit in trade play.

That means, if you want to invest $500, you can buy only 5 shares of the stock trading at $100, but you can get say 5000 shares of the penny stock trading at $0.1 with the same amount. Yes, it may sound good in numbers, but it’s a viable option only till you have a short-term or intraday trading goal. It reflects a large bid-ask spread where a greater number of holdings are controlling the share price movement, and any change in the fraction of cents will show a multiple price percentage change.

Market Capitalization & Share Outstanding- To evaluate the quality of the company recognized as penny stock it is important to take market capitalization and shares outstanding into consideration. There is no set demarcation for the market capitalization of the penny stock, but they generally range within $50 million to $300 million.

As we all know, market capitalization is based on two factors that are, shares outstanding and stock price of the company. So, any change in the outstanding number of shares can cast a direct impact on the stock price. Therefore, it is essential for the shareholders to get track of stock splits, any options exercised, or the capital raising through the issuance of shares as any of these actions taken by the company will heavily dilute the ownership percentage of the shareholders along with getting hit by a direct meltdown in the stock price.

Stock Performance Graph- Making money is not that easy! Research always play a vital role when it comes to investing. For an investor to identify a spike and buy low for lining their pockets with huge profits, they need to go back and track the trend. It can be done using research tools or through a general analysis of stock performance. There are many financial advisory firms like Kalkine: Equities Research Firm which offers their advice on penny stocks to investors and help them to decide whether they should buy, hold, or sell a stock.

The punters looking for a winning penny stock should stalk the industry news, the stock that has already zoomed up a little or have the potential to set new high and for any management and business related information that will certainly show its impact on the stock exchange.

The buy-and-hold strategy is never considered a smart option for penny stocks. So, earning a decent profit or incurring small losses are always more advisable instead of going ‘long’ with penny stock and getting exposed to huge risks.


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