There is no shortage of stories on the internet about some lucky investor finding a gold mine after a penny stock investment shot up to a much higher price. Those stories make you want to invest in penny stocks, but you should realize not every penny stock will make you money. Check for some of these indicators before you decide to invest in any penny stock.
Company Announcements
One of the best indicators for a penny stock’s rise is favorable company announcements. This fact is especially true for biotech penny stocks that are working on breakout treatments for various diseases and ailments. Following the news closely will help you find opportunities in which a stock may rise before settling again. Doing due diligence before investing in any penny stock will help you follow when company announcements tend to be made. Just be aware that announcements that are thought to be positive can sometimes end up negative and send the stock spiraling. Even the best penny stocks are also susceptible to pump and dump schemes where paid promoters get the stock’s price to rise so higher-ups can cash out at the peak.
Small-Cap Stocks
Small-cap stocks with a value between $50 million and $300 million are the most common penny stocks, but several large companies started out in that category. Facebook, Netflix, Amazon, and even Apple were all at one point considered small-cap stocks. Researching a company’s fundamentals and technology will help you decide if the stock is worth a short-term or long-term investment. Companies that have contracts with larger companies and lots of insider-buying illustrate that the executives are confident in the performance of their company.
Technical Analysis
Remember those paid stock promoters I mentioned before? They’re rampant in penny stocks since they’re easier for the average joe to trade. Performing technical analysis on a company’s stock charts will help you spot these pump and dump spikes. If you can find evidence that a spike was in correlation to a company announcement, either positive or negative, it’s less likely the stock is part of a pump and dump scheme. Always do your due diligence to understand why a stock moved the way it did before investing and have a solid exit plan before you enter.
Spikes in Trading Volume
Another good indicator to keep an eye on is any spikes in trading volume. Positive news will cause a spike in trading demand, thereby increasing the price. When daily trading volume reaches double the average, that can be a good indicator that it’s time to invest in that stock as a sign of an upward trend. Volume increases that come with a drop in a price should be handled very carefully, as this could signal a downward trend is starting.
Check in on Management
Past performance is a good indicator of future performance, but the same can be said of individuals. Look into the people serving as executives in your chosen penny stock and assess whether their previous ventures have been a success. For example, Elon Musk created PayPal before he moved on to Tesla and Space X. CEOs who have had a positive impact on their companies will be touted right on the company’s homepage as a selling point. Look into the board of directors and understand the people running the company to get a better picture of whether you should invest or not.
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