Researching a penny stock company can be relatively more challenging than regular stocks listed on the main stock exchanges. Regular stocks are subjected to strong regulations about information disclosure, which makes it fairly easy for investors and analysts to access verifiable information about such stocks. However, researching a penny stock company usually requires some kind of professional assistance, which could be in the form of a paid stock research service specializing in penny stocks, or a consultant or broker dealing exclusively in penny stocks.
The popularity of the Internet has made researching penny stocks easier on the one hand, but on the other it has also led to the dissemination of hyped, manipulated, or fabricated information on unscrupulous websites and spam emails. Penny stock companies are more exposed to the risk of pump and dump scheming, which can result in the spread of rumors and misinformation about targeted penny stocks.
Short-list a few Penny Stocks for Research
The SEC defines any stock below $5 market value as a penny stock, but the definition varies according to the perception of different investors. Therefore, the first step in your research should be to decide on a cut-off value such as $5 or $1, and look at various stocks below that value on the OTC exchanges and Pink Sheets.
Secondly, identify the business sector in which you are keen to put your investment. Gather information about the growth prospects of that sector in general, and if it shows promising signs, look for potential penny stock companies within that sector. That will make your research more focused and manageable.
Identify your Targeted Penny Stock Company
From your short-list of penny stock companies, first you can screen out such companies that are completely opaque about their financial and business information. If the company is unable to provide any hard facts or figures, and is only attempting to create hype without backing it up with verifiable data, you can ignore such company.
Among the remaining stocks, compare the performance history and stock price patterns of each stock. The penny stock company that reveals a significant trading volume on a daily basis over a period of time is likely to be more promising than other stocks that do not show any such trading activity.
Look for Cold Facts and Figures
Try to find out information about the cash reserves or debt position of the targeted penny stock company. Take a look at the sales volume, revenues, and profit margins of the company for the last three to five years. If such information is not forthcoming, look for any special news about the company that is causing a heightened trading activity in the stock.
Check out the financial charts, price patterns and other data for the penny stock company on leading independent finance websites such as Yahoo Finance, Google Finance, and others. Before you invest in the targeted stock, you can also subscribe to a reputed penny stock email newsletter for more information, reports, and news about the company.
Be Cautious about Biased Information Sources
Certain penny stock websites, newsletters, and other resources for stock tips may have a vested interest in promoting a particular penny stock. Such information sources are required by law to declare their interest publicly in their disclaimer section.
You ought to evaluate the advice of such paid stock pushers with caution, and particularly be wary of illegitimate websites, emails or phone calls that may have a bias, but fail to disclose it with their recommendations. The SEC’s Office of Investor Education and Advocacy also provides valuable information to help people and investors, small and large, invest wisely and avoid becoming a victim of someone’s fraudulent schemes.