Penny Stocks - Not Just for Scam Artists Anymore

Penny stocks have a bad name, but there are some quality companies.

Scam Artist Arrested in New York
Andrew Burton

The biggest challenge in being the Authority on Penny Stocks is to overcome the numerous (and well-deserved) negative connotations which surround low-priced shares. After all, they are low-priced for a reason, and their volatility makes them perfect vessels for con-artists and liars.​

Yet, there is a good side to penny stocks. Almost all companies start small, even the great ones and their journey from obscurity to relevance can be very lucrative for the shareholders.

Whether they are brand new, or still very small, or have fallen out of favor with investors, many companies trading for pennies actually are wonderful businesses. Of course, the vast majority of penny stocks (as many as 95% by our estimates) are terrible investments and are likely to cost investors every dollar you might put into them.

Of course, it all comes down to finding the highest-quality companies from among the low-priced stocks. You can root out the risks and lackluster businesses quite easily, and then it is just a matter of knowing what makes a great company, and by extension a wonderful investment.

Avoid Scams

  • Avoid Free Stock Picks!
    Do not follow stock picks you hear about for free. This includes message boards, free newsletters, websites, printed materials in the postal mail, unsolicited faxes, e-mails, tweets, and even the rumor from your coworker.
  • Avoid Pinks and QX:
    Do not buy Pink Sheet stocks or those listed on the inferior exchanges like the OTCQX. Stick to the great markets (AMEX, NASDAQ, NYSE, Bulletin Board).
    • Paper Trade:
      Always start your journey into penny stocks by paper trading. Why rush? Learn to make money before you risk money.

    Just by following the three points mentioned above, you will sidestep 95% of the scams and pump & dump schemes, and avoid the sea of low-quality businesses. This is only half the battle, of course.

    Next, by putting each and every penny stock through detailed analysis, you will find which hold the most promise for shareholders. Some things to look for in every low-priced company you review include but are not limited to:

    • strong financial position (assets greater than liabilities)
    • growing market share
    • increasing revenues
    • low debt, strong cash position
    • management team that was successful with their previous company
    • improving financial ratios

    To put it in perspective, when our team looks into a penny stock for potential inclusion in our newsletter, we spend dozens of hours. This is in addition to watching the company ahead of time for months or years and in some cases decades!  And of course, a phone call to the corporation is always the best way to get answers.

    We still do not always get it right, and neither will you or anyone else. However, you will find your results improve dramatically in direct proportion to your efforts. When you learn the types of efforts which pay off, as well as the kinds of shares which will typically soar, there is no other game in the investment world more fun and lucrative than trading penny stocks.