How to Find the Best Penny Stocks for Your Portfolio

Penny stocks are complicated. These low-cost solutions for diversifying your portfolio can give you access to a range of excellent companies, without the need to spend huge amounts of cash.

Trading (photo credit: INGIMAGE)
(photo credit: INGIMAGE)
Penny stocks are complicated. These low-cost solutions for diversifying your portfolio can give you access to a range of excellent companies, without the need to spend huge amounts of cash. If you know your way around your chosen industry, and you understand how to separate excellent opportunities from potential scams, then you can make some real cash as a swing trader with these kinds of shares. Unfortunately, although some people can succeed with low-cost securities, others find themselves getting caught up in dangerous scams and pump and dump schemes that lead to them losing money instead of gaining it. Fortunately, there are some ways that you can improve your chances of finding the best stocks for your needs in this relatively volatile environment

Choosing Low-Cost Stocks

The most important thing you can remember when you’re choosing low-cost shares for your portfolio is that you should never just follow the tips that others give you. This is one of the most common ways that people fall victim to scams and other dangerous activities. Instead, you need to ensure that every time you think about investing in a business, you’ve done extensive research into that company. Blindly following media and investor sentiment is what led to the dot com bubble a couple of decades ago, and is what is causing the large swings in intra-day trading that we have seen since COVID-19 shook the planet. Whether you are investing with the current climate in mind, or after the market and global turmoil pass, it’s the fundamentals that count the most. Regardless of what the Wallstreet analysts tell you, or Jim Cramer squawks about on TV, you need to make pay more attention to the actual earnings and valuation of any specific company you plan to invest in.

One of the biggest risks of investing in a penny stock is that the business you’re getting involved with might not have been in the industry for long. Because of this, the company is unlikely to have much of a background that you can rely on. However, you can look into things like the executives behind the business to see if they have a track record for achieving excellent things with prior businesses. You should also be looking for companies that are already making money in some way. Even if the profits in the business are only small, to begin with, you should be able to see that there’s potential for that organization to grow. Of course, there are exceptions to this rule if you are talking about Netflix or ROKU, but when it comes to penny stocks, a proven track record of earnings is important.

Finding the Right Investment Opportunities

Aside from looking for a business that’s making money, you should also make sure that the brands that you’re thinking of getting involved with have substantial access to cash and assets. Strong businesses shouldn’t be liquidating parts of the company to appease stakeholders and creditors. Look for any signs that the company you’re thinking of investing in is losing money. The best place to look for financial stability is the company balance sheet! Even if you aren’t financially savvy, there is plenty of information online that explains the key points of any balance sheet. Liquidity is probably the most important, which is best measured in terms of working capital. Working capital is the single most important aspect of any balance sheet, which simply tells you the short-term ability of a company to pay their bills.

Your organization of choice also needs to have the right strategy in place. This means having outlines published for the public that highlight how they’re going to make money and repay any creditors. The more research you can do, and the more you can learn about the companies that you want to get involved with, the safer your investment will be. At the same time, don’t underestimate the value of choosing to invest in companies in an industry that you’re knowledgeable or passionate about. It’s often much easier for beginner investors to see potential opportunities and bad signs in sectors that they already have a lot of background knowledge. Put your education and your understanding of different environments to work when you’re making decisions about where to spend your cash. This will pay off in the long-term.