Good penny stocks - A beginner's guide to spotting top performing penny stocks   by Ryan Whisner

in Investment    (submitted 2011-04-23)

It is no big secret that people in the stock exchange are perpetually searching for ways to spot good penny stocks. Since penny stocks require very little capital and can give huge returns they have a large following amongst investors looking for high rewards with little investment. Of course, high reward also means high risk and penny stocks are also notorious for burning many investors and traders. The bottom line is this, if you want to indulge the enormous potential penny stocks have to offer then it is critical that you discover good penny stocks and also implement a well defined and thoughtful strategy that keeps your losses to a minimum and maximizes your returns.

As simple as a low loss and high gain strategy sound, it isn't quite. We all know how the stock markets have stripped so many folks who thought that they were too smart. Irrespective of where they had invested, whether large or medium or small companies, a great number of investors and traders have suffered some shocking losses in the stock market. Ironically, inspite of everything, some of the greatest wealth is generated, on a regular basis, on these same stock exchanges. Meaning that it is definitely possible to minimise losses and maximise profits, provided you learn how to manage risk.

So here are some important considerations for selecting great micro-cap and small-cap stocks and producing an useful risk management strategy. These tips are a great paradigm to follow and I have found them to work with companies of different capitalizations. While companies of all market capitalizations offer good potential, I like micro-cap and small-cap stocks because of their ability to give big profits with little cash and just the same amount of effort.

1. Information is key in finding good penny stocks. Now lack of good information is one of the main hurdles to deal with, when trying to discover great micro-cap and small-cap stocks. See, it really is very simple, the only way to know if something is good or not, is to learn as much about it as you can. Thus, putting you in a better position to calculate risk and consequently minimize your losses. And if the data of a particular company is really hard to come by then the best thing to do is skip it. Remember, there is no scarcity of penny stocks, so don't make the mistake of choosing a penny stock blindly.

2. All stocks, penny or otherwise respond with respect to certain events popularly known as triggers. Stocks react, negatively or positively, in anticipation of their trigger events. Pay close attention, I said "anticipation". Now this is very important. Buying a stock post the event causing the news flow can be dissapointing because by the time the event comes to pass the stock would have already done its bit. In most circumstances, right after the event the stock price of a small-cap or micro-cap shares can drop drastically as traders and investors book profits and more so if they have had good results. So this period can be very risky. Thus you must be vigilant about news flow when trying to pick a good penny stock.

3. When spotting good penny stocks, it is not enough to home in on a company based on news events and information about that company. It is absolutely critical to discover the best point of entry, exit and the value of the stop loss which will serve as protection when you get it it wrong. Without a stop loss your risk will be unlimited and thus it is key. Use the companies technical charts to realize what these data points should be. Pay special attention to trade volumes as they too have a story to tell. Now, new small-cap and micro-cap shares do not have enough history on the exchange to calculate these values. So I recommend avoiding such stocks.

You must have realized by now that trading and investing in small-cap and micro-cap shares is a tricky business. Being able to pick good penny stocks requires in-depth knowledge and experience, all of which takes time. Of course, what good is a problem without a solution. The safer work around to the problem is to trade alongside a really successful trader and investor who can substantiate himself. In this system you would let the expert discover good penny stocks and advise you on when to buy and sell, thus piggy backing on his or her expertise for spotting top performing penny stocks.

About the Author

You can trade alongside an expert and get 2 free stock picks by just visiting Penny Stock Guide.