Many stock investing experts believe that penny stocks are worthless, that investing in small cap stocks is dangerous and that investors should avoid them at all costs. This view is valid in various respects, except that by completely ignoring penny stocks, you are throwing the baby out with the bath water. Applying yourself to analysing small cap stocks through identifying excellent small companies can reward you richly. You may discover a future giant. You see, the “enemies” of penny stocks do not take into account that gigantic companies whose shares are now all time “blue chips,” once started as penny stocks.
When buying stocks you buy shares of a company. This company has decided to expand its activities, and to do that it needs money. One way of obtaining funds is to issue shares. The company has to be listed on the stock exchange, where the shares of all other listed companies are traded. Despite fluctuations, the share price of a prosperous company usually rises, but it can also drop when the company, for instance, does not show a profit. The price can also drop if the stock market as a whole has a downturn, often the result of broader economic problems, of a national or international nature. Sometimes a share gets a pounding because the sector of the market in which it operates suffers a drawback. Over time, however, the share prices of large, prosperous companies have risen dramatically, earning their shareowners huge fortunes. Today financial analysts show figures that confirm that stocks have outperformed all other investment instruments in the long term. Especially long-term investors are advised to keep a share portfolio in their investment portfolio to hedge them against inflation.
Selecting Good Stocks: Fundamental Analysis
As indicated above, you actually research the company and not the stock you are interested in. There are a number of guidelines to assist you when scrutinizing a company to determine whether it is worth investing in. The process is usually termed fundamental analysis. The greatest stock investor so far in history, Warren Buffett, uses only fundamental analysis to select stocks that meet his criteria.
We shall now discuss the criteria for selecting good stocks. Note that these criteria are applicable to all stocks. They entail Fundamental Analysis and Technical Analysis. After this, we turn to penny stocks to explain their specific characteristics and information on how to find them.
Four of the most important requirements when studying a company are:
• Product: Is the company’s product something new, or does it fill a gap in a particular niche? Is it a quality product? If not a new product, will it compete effectively with existing products?
• Profitability: Does the company make a profit and has it made profits over a period of three or more years? What do its debt levels look like?
• Resilience: How robust is the company? Does it have the potential to withstand inflation, higher interest rates, a rise in fuel prices etc.?
• Management: Is the company’s management competent? Are they people with integrity, good reputations and diligence? Do they publish financial reports regularly and on time? Do they have open communication with their shareholders? The CEO (Chief Executive Officer) plays a key role in the management of a company. Although this must be a consideration, it does not mean that a CEO with a magnificent record with one company will automatically achieve the same proficiency with another.
Selecting Good Stocks: Technical Analysis
Another method to uncover the best stocks to invest in is to use an instrument that is termed technical analysis. Technical analysis attempts to determine future price trends by analyzing factors such as previous prices, trade volumes etc. A variety of indicators presented as graphs show statistics on shares and market sectors. Using these indicators can give you an indication of the current achievements of market sectors, while also assisting you in selecting the best stocks in a specific sector. The most important value of technical analysis is that it assists you in your decision when to buy and when to sell a stock. Some of the most used technical indicators are moving averages, bar graphs, trend lines, support and resistance, volume, momentum, relative strength, overbought/oversold oscillators, and stock patterns such as head-and-shoulders formation. Since these indicators are presented as graphs, it will be necessary to consult internet websites that provide these technical graphs. To utilize technical indicators best, special stock market programs are available to assist you with technical analysis when you have become an advanced investor.