7 Things to Know Before Investing in Penny Stocks

Penny StocksPenny Stocks to Watch 

Penny stocks are some of the most enticing draws for investment on the market. And for good reason. The penny stock market is very much feast or famine.

Pick them right, and you could own hundreds, or even thousands of shares in a company that experienced double, triple, quadruple, or perhaps even higher returns. At the same time, penny stocks are not exactly known for their staying power and reliability. And that’s what makes the penny stocks to watch so important.

Knowing how to identify, classify, and ultimately invest in penny stocks takes careful attention to detail, a strong analysis of the market, and—at times—nerves of steel.

There are plenty of ways that a ticker on the penny stock market can go very right, yielding lucrative results. There is also, however, a healthy dose of potential pitfalls that investors ought to be aware of and ready to avoid.

And that brings us to the seven things to know before investing in penny stocks.

How to Find Penny Stocks

The key to finding a good penny stock is not all that different from finding any good investment opportunity: know the company.

One of the most crucial investing tips you’ll often hear is to know the company inside and out. If you do that, you should have at the very least a comprehensive background understanding of that particular company.

With that information in hand, you should be able to identify what about it makes it a solid pick, what is the competitive advantage of said company, and what would make that pick a sustainable one moving forward.

By nature of it being a penny stock, however, you’ll often find a company that is undergoing one of several different stages that more established companies have often grown past. For instance, a penny stock could be an upstart company with an experimental or new product, or perhaps one with an innovative means of production.

Conversely, a penny stock can be a once-higher-valued company that fell upon hard times but is now looking toward a resurgence.

The point being that there’s a reason this company is a penny stock, and that should not be ignored. So the takeaway here is to do your research and trust in your investment!

How to Invest in Penny Stocks

Like all investments, the key to investing in penny stocks is timing. One of my preferred strategies is to find an emergent technology or industry and identify a strong, if undervalued, player within that sector.

Especially in the tech world, there are a great many companies that are all vying to bring us the next revolutionary product or innovation on some existing platform or service.

Find said market (which isn’t as difficult as you would think if you follow the news closely enough) and then identify a capable player operating in the market, and you may have discovered one of those winning penny stocks.

The best penny stocks to watch are those that are about to be swept up in a torrent of goodwill and hype due to an industry’s growth overall. While you don’t want to be caught by a company that is all hype, allowing a bit of excitement to push stock prices never hurt anyone (just look at Apple Inc. (NASDAQ:AAPL) before every “iPhone” launch).

How Risky Are Penny Stocks?

Due to their relatively volatile nature, penny stocks can be prey to day traders, short-sellers, and just, in general, run the risk of collapsing due to their low value, market cap, and lack of prolonged stability.

As I’ve mentioned several times before: there’s a reason these companies are on the penny stock market.

Knowing that reason and being comfortable that it is not a concern, or worse yet, an impediment to future success, means you can with confidence put some money in that bargain ticker.

At the same time, remember why you’re investing in penny stocks. It’s not for a dividend or because you expect modest growth over a 20-year span. If you’re in the penny stock market; it’s because you’re looking for something more along the lines of a gamble and not a slow-and-steady approach.

It’s a risk/reward dynamic that is not for everyone, but one that carries with it inherent promise.

How Are Penny Stocks Traded?

Penny stocks can be traded on the open market but also are often traded over-the-counter through the OTC Bulletin Board (OTCBB) and/or through the use of pink sheets.

What is worth mentioning is that they are often the targets of day traders and other investors looking to make a quick buck, which again can increase volatility.

Penny stocks are not always a buy-and-sell investment, but there are usually more dramatic swings in a penny stock’s value. That’s especially true in the early days after a large surge, when trading will increase and so too will the unpredictability of the shares’ value.

Where to Invest in Penny Stocks?

The way I see it, there are three markets, in particular, that have drawn my interest in terms of where to find the best penny stocks to watch. Before we get to those three, however, it’s worth talking about an honorable mention.

I am a strong proponent of the artificial intelligence (AI) market, and I believe that companies that harness the technology and use it to its fullest capabilities will be among the tech titans of the future.

The only issue is that a lot of big players, with vast amounts of resources are competing in this space, and they often buy up smaller competitors before they get to market, especially when it appears they are nearing a breakthrough or developing innovative tech.

Having said that, AI penny stocks could be some of the more valuable stocks on the market, due to the industry potential. Of course, as with the first step, you’ll want to check out each company individually before getting too hot on AI. The first barrier is finding them.

With AI out of the way, let’s get to the three sectors I see poised for growth and ones that could have plenty of penny stocks to choose from. The three are:

  1. augmented reality (AR);
  2. lithium mining; and
  3. marijuana stocks. 

Marijuana as an industry already has some of the hottest penny stocks to watch. Its track record for transforming stocks worth less than a dollar into ones with exponential gains has been demonstrated already several times over.

Lithium mining is projected to come into two different crosswinds that can help put the wind in its sails. The first is the increasing demand for lithium as the material becomes integral to powering everything from zero-emission cars to our homes. The next is that lithium is jumping in price as a result of said demand. These two factors can help companies that already have stakes in lithium mines grow.

AR has been lauded by tech luminaries like Apple CEO Tim Cook, and its potential was put on full display with the roaring (if short-lived) success of Pokémon GO.

These three industries might be some of the better ones to watch, especially where penny stocks are concerned.

The penny stock market is often a large beneficiary of an industry-wide trend or push, and these three sectors are all looking to be on the rise, both in the near term and in longer projections.

Penny Stocks List 

With all those tips out of the way, here are a couple of stocks that I believe exemplify the qualities you’d hope to find in good penny stocks.

The first is Aphria Inc (CVE:APH, TSE:APH). Having risen from less than a dollar per share to over $6.00 in just about a year-and-a-half, you have a company that has shown it can grow, and not just in its share price.

aphria stock chart

Chart courtesy of StockCharts.com

As a marijuana company, APH stock uses greenhouses to help stabilize its crop production. While this does have certain drawbacks, ultimately it is a method that will likely ensure stability and a competitive price point versus rivals.

While many companies in the marijuana market have seen large gains, APH is different in that I believe it is a penny stock that can make it for the long haul, both through the hype boom times and much later, after the dust has settled.

Critical Elements Corp (CVE:CRE) is another one of the penny stocks I believe is on the way to rise. Lithium is a critical component of next-generation tech that is likely to become, if not ubiquitous, at the very least prominent in how our society operates. As such, companies like Critical Elements that have stakes on lithium mines could be very much in demand in the next few years, with big players like Tesla Inc (NASDAQ:TSLA) having a profound effect on lithium demand.

cre stock chart

Chart courtesy of StockCharts.com

Should You Invest in Penny Stocks? 

Penny stocks are certainly not for everyone.

The penny stock market can be daunting. The penny stock market is full of great ways to make some big returns, but also a lot of duds. That’s not necessarily all that different from the stock market at large in a meta sense but, on a micro level, this is far more prevalent in penny shares.

That’s why finding good penny stocks to watch, biding your time, and making your play at the right time is key to seeing favorable results.