The Truth About Penny Stocks

Friday, June 09, 2006

The Truth About Penny Stocks

Penny stocks are the stocks of any company that trades below a certain price. What is a penny stock depends on your point of view to a certain extent. Big brokerage firms often consider anything under $5 a penny stock. In my opinion, and for the purposes of this article I consider penny stocks any stock trading for under $1.

The truth is that, although people often try to hype novice investors to buy into questionable companies by using the allure of the penny stock in general sticking a lot of beginners with bad picks, there really are great opportunities in the pennies. Like any other stock, to find the real opportunities, and separate the wheat from the chaff, so to speak, you need a little knowledge. To get this knowledge, and make good decisions, you need to research several key things.

First, does this company make money in the real world? Does it have earnings? The second big pitfall for beginners is that once they learn what EPS stands for, they think they have the answer to the basic question of a company’s profits, but they may not. Earnings are often inflated for a company that is seriously on the rocks by selling off their assets. This shows up as earnings, although it is really an indicator of a newly decreased or now non-existent ability to make money. Before you buy on EPS, check for discontinued operations.

The EPS is related to the P/E ratio. EPS is per share earnings while the P/E ratio compares earnings to share price by dividing the price (P) by the earnings (E). A one to one ratio resulting in a P/E of one is excellent, and below one is outstanding. IF, you have already determined that the earnings numbers actually represent something real the P/E ratio is the best single indicator of the real value of the stock.

Armed with this basic information you are far better prepared to do battle in the penny stock markets. But, you are by no means invulnerable. Lawsuits and bankruptcies that you are unaware of can make your money disappear. To increase your safety, you should read all the news you can find about your company. Even then the vagaries of the market can beat you, but you will have done enough work that even if you do lose occasionally (which you will) You can take advantage of the one great strength of penny stocks. Their capability to make huge percentage gains in just a day or two. I've seen it for myself, over and over, and you can too, if you are willing to do a little work.

The stellar profits are real, but it takes WORK to make them. I might be an optimist, but I’ll never put my money in a savings account for 3% ever again. I have losses from time to time, but I have spent thousands of dollars in the real world that I never would have had without penny stocks. There really is risk, but with solid research, patience, hard work, and maybe a little luck now and then, penny stocks are for real!

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