Penny stocks literally trade for pennies per share, or for as much as a couple of dollars. The beauty of penny stocks, of course, is that sometimes they ‘grow up’ and become mid-cap stocks, multiplying in value hundreds of times over and making many people very wealthy.
With penny stocks, also called micro-caps or juniors, you will see much greater price volatility, and thus greater and quicker gains and losses in asset values. It is precisely this volatility which draws investors to the junior markets, as one good pick could make you hundreds of times what you could ever make on the larger markets.
Profit Potential
There are several ways to profit from penny stock investments. Modern Strategies Inc. has uncovered the most highly rewarding investment situations.
Promotional Stocks – These issues may or may not have much actual value. Promoters generate interest in these types of stocks in an attempt to drive share prices higher. The promoters own great amounts of shares and so they make more money the higher the share price travels.
Technical Precursors – Often technical analysis can reveal patterns in the trading cycles of penny stocks. Sometimes these patterns illustrate excellent buying opportunities, where the underlying stock has a high probability of moving up strongly, and only a low probability of declining in value.
Fundamental Strength – Fundamentals involve such criteria as earnings, debt load, assets, and many others. Instead, uncovering the best medium to long term investment opportunities must be done through exhaustive analysis of company financial statements. Investors should get involved with the companies that are making the most money, have the most effective management, and have improving trends in all factors of their operations.
Undervalued Situations – Sometimes companies see their share price slide dramatically. There are occasions where this decrease in price has very little to do with the underlying fundamentals, and more to do with factors such as overall market weakness, interest rate increases, or others.
Minimized Downside – Often the combination of technical analysis and undervalued situations can reveal penny stock companies that have tremendous upside potential, and have a very low probability of declining in value to any significant degree.
These type of investments are excellent choices for penny stock investors that are less risk adverse.
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Learning to identify an undervalued stock requires an investor to be in tune with market cycles, and act with courage when they find an opportunity. For example in the last 6-9 months, the global financial crisis saw the share price of most banks tumbling, by more than 50% in some cases. Anyone buying at that time might have doubled their money by now – an incredible return. Of course, buying shares in the middle of a huge market crash requires nerves of steel – but you can bet that the big boys were doing just that.
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