The world of penny stock can be very lucrative and speculative. Most traders will have heard that up to 90% of traders lose money while trading and you can bet that a large portion of these losing trades are as a result of microcap. The main reason people lose money in microcap companies boils down to lack of education, over speculation and listening what others are saying about a company without carrying out their own due diligence.
Here I want to talk about the best methods of determining which penny stocks to buy and how to choose the most profitable ones. Fundamental analysis has been a reliable method of picking a good microcap stock to invest in but is not suitable for most penny stocks for two reasons. Firstly many of the penny stocks out there are not trading on any of the main exchanges but instead on the OTCBB or Pinksheets. Information for these companies can be difficult to come buy and not always up to date.
For these reasons it cannot be relied upon and makes it difficult to source a good microcap companies to invest in. Secondly, the very nature of penny stock trading is generally for the short term investor or ‘penny flipper’ as they are sometimes known as. Fundamental analysis is used in the determining of a long term investment and is therefore not suited to a short term trade or swing trade.
Technical Analysis is one of the most accurate methods used for determining market trends and making a decision based on the findings. However many penny stock are so volatile that technical analysis can prove inaccurate and often misleading. Also many microcap not trading on one of the major exchanges have delayed quotes; this can be disastrous if you have a market order placed while looking at a quote that is delayed by 15-20 minutes. That is not to say that technical analysis is not reliable when it comes to penny stocks but rather less reliable compared with choosing a blue-chip company to trade.
Another method of picking a good penny stock to trade is by listening to the news. Every day there are many penny stocks whose share price rockets by 50% or more on some positive news being released on the company. Keeping on top of the news about to be released of every single penny stock company is next to impossible if it weren’t for stock picking services and newsletters. This can take a whole lot of work out of finding a good trade with less risk. The company providing the service has its sources and when they believe that a stock is going to soar, they immediately turn to the balance sheets and carry out technical analysis on the penny stocks. The result is a trading alert sent to you by email notifying you of the potential for large gains from microcap.
The above three methods of picking a good penny stock to trade are only suggestions and are not financial advice of any description.
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