How do I decide which penny stocks to buy?

Many investors consider penny stocks - stocks that trade below $5 a share in the over-the-counter markets - to be a high-risk investment. Those who are willing, or even eager to test the waters of penny stock investing need to know how to decide which penny stocks to buy. It’s a good question, because sifting out the best penny stocks can often be a challenge, since oversight, research and coverage of the stocks is often spotty. That means prospective penny stock investors have to go the extra mile when doing their research.

Researching Penny Stocks

The first thing you’ll want to look at is the history of the company offering the penny stock you’re considering. This part of the research usually isn’t too difficult, and a Google search should uncover all you need to know about the company. If you aren’t able to locate any historical price data or financial information about the company, you might consider it to be a red flag indicating the stock isn’t worth investing in.

Evaluating Penny Stocks

After researching the history of some companies you should have narrowed down your choices to a handful of potential investments. Now it’s time to take a closer look at the shares you’re considering. See how many shares are outstanding, what the market cap of the company is, and any recent or upcoming activity that dilutes the value of shares, such as new share issuance or stock splits. Usually a stock with many shares outstanding will find it harder to gain value than a company with few outstanding shares. That means a new share issuance and stock splits typically lower the value of outstanding shares.

Assessing Risk

All stocks come with risk; even the largest and most solid companies. However,penny stocks come with some unique risks you have to be ready to accept. They include low liquidity that could make it difficult to sell your shares. Keeping your risk tolerance in mind when deciding which penny stocks to buy will help ensure you have a positive experience and hopefully make solid profits with your penny stock investments.