Would you like to learn how to research penny stocks without relying on others? Understanding a few basics is enough to quickly analyze a penny stick. It might seem intimidating at first, but trust me, it’s not difficult. Don’t be the person to put money into an idea that sounds promising and later discover that it is a pump and dump.
Penny stocks mostly target retailers and who can blame them? The potential for big wins is delicious and blue chip stocks are boring – especially when you’re only trading for a few thousand dollars.
Below are the steps required to do the research:
1. Find penny stocks to trade
Since there are thousands of penny stocks out there, it can be difficult to decide where to start. Pro-traders typically use premium stock screeners like Trade Ideas to find penny stocks based on certain criteria – top winners, biggest losers, stock gaps or insider buying, etc.
There are free screeners at StockFetcher.com and Finviz.com. They are more limited but great for beginners.
Below is a list of the stocks I generated using Finviz.com using simple filters. I looked for stocks under $ 5, market capitalization of $ 50-300 million, average size over $ 100,000, and stocks outstanding under $ 20 million.
Outside of scanners, researching new trends / industries on Google is a good starting point. For example, if the crypto market is warming up, look for blockchain or NFT-related penny stocks. To inspire you, the industries I am currently researching are uranium, artificial intelligence, 5G, and e-commerce. Based on the trend, I filter for stocks that could benefit from industry growth and dive deep into the business. Be wary of penny stocks trying to bet on trends unrelated to their core business!
2. Beware of dilution
Stock structure is one of the first things I check when analyzing a stock. Penny stocks tend to be severely watered down as they have to keep issuing stocks in order to raise money. The more outstanding shares there are, the more volume it will take to move the share price. If you want the stock price to go up, it will take more purchasing power. There are penny stocks with hundreds of millions, even billions of stocks available. In general, I prefer stocks with fewer than 50 million stocks. You can view the sharing structure on Yahoo Finance. For example, GNUS has 300 million shares outstanding.
3. Review the financial information
If you are trading penny stocks on a daily basis, the financial data may not interest you, but it is well worth a look. I am pleased with an improvement in sales, net profit and cash flow compared to the previous year and compared to the previous quarter. Finances don’t have to be perfect, but everything should be going in the right direction and the debt burden is not a burden. I also like to compare the financial data with the closest competitors to make sure the valuation is realistic.
Important financial metrics
- Price to sales
- Current relationship
- Operating cash flow
- Inventory turnover
- Debt ratio
4. Find a catalyst
The penny stocks you discovered most likely attracted you to a potential catalyst. Catalysts are not difficult to find and “trade gurus” regularly pump them up afterwards. It’s important to note that these narcissists only care about their own interests, not yours. Don’t chase stocks after the catalyst is over as penny stocks fall quickly. They take the stairs up and down the elevator!
Ok enough lint, let’s cover the main type of catalysts.
Strongly expected result
Sometimes traders have reason to believe that a penny stock will return strong profits. Find out in good time the date a company publishes its earnings report and keep an eye out for the latest news. Typically, penny stocks will go up before profit and when profits are released there will be a slight decrease.
Penny stocks usually lose money, but if they become profitable their stock price should go up. The transition from losing money to making a profit is an important milestone and can be a good time to buy. This information is available in the quarterly or annual results report. You can view the latest cash flows and debt changes for a business on Yahoo Finance.
FDA approval is the godfather of all catalysts for biotech penny stocks, resulting in huge upward movements. These can be risky trades as you have to buy before 100% profit is confirmed. For information on upcoming FDA filings, visit sites like Biopharm Catalyst and FDA Calendar.
Patent application and approval
When a patent is pending or approved, it receives a lot of media attention. Patents can be filed in any country, but US patent approval is big news if the patent matters. Visit the US Patent Office website for the latest patent news.
When a CEO or director starts buying a large amount of stocks, it is a positive sign for the future. CEOs aren’t allowed to act on inside information, but let’s face it, some do. To find insider buying penny stocks, visit insidertracking.com for the inside information.
Companies entering into new strategic partnerships are worth following. In general, a partnership means joining forces with another company to help provide a product or service. It might make more financial sense for a company to outsource an aspect of its business, such as Coca Cola, which outsources its packaging and bottling. At Penny Stocks, the vast majority of partnerships are oversubscribed and only announced in press releases to pump the stock.
5. Perform a technical analysis
Technical analysis examines historical chart patterns to predict the future direction of a stock price. It’s important to understand that technical analysis is not useful when a stock is trading thinly or when it is part of a pump-and-dump system. In general, the larger the trading volume, the more reliable the chart patterns become.
Five Basic Technical Analysis Terms You Should Learn:
- Support levels
- Resistance Levels
- Moving averages
- RSI (Relative Strength Index)
- MACD (Moving Average Convergence Divergence)
Below is a video by Peter Leeds that explains the fundamentals of candlestick charts, chart patterns, and key technical indicators.