• Penny stocks are cheap for a good reason that is reflected in their stock price. The reality is that many of these businesses are start-ups avoiding the expenses of an Initial Public Offering or they do not have a business plan or model that is sufficiently attractive to attract other forms of investment. This does not necessarily make one of them a poor investment but realistically with your chances of profiting from your investment are not good. It is possible that you could identify a company that becomes the next Microsoft and provides you with stratospheric returns but you have to live with the fact that these opportunities come far and few between. In fact you would be lucky if you made one such investment in 10 years.
• Where possible, look for shares with reasonable daily volumes of trading. If a share trades 1 million shares in one day and then does not trade for the next month, the average daily volume drops to just over 30,000 shares. This example also illustrates the importance of timing because if you do not catch the one-day and the trading volume happens, you will not have a chance to trade for the next month. You will also want consistent volumes so that you can enter or exit as you choose. Also check whether one small group of traders are accounting for the volume because this means that the price is being manipulated. Without establishing liquidity, you are probably staring a dead investment in the face and will need to take substantial sacrifices in price just to sell your holding.
• Establish if the company could be profitable in the long run. Most start-up businesses tend to lose money in the short run and the key to good management is to establish long-term sustainable profitability. If your potential investment passes this test, you are less likely to lose capital and more likely to earn acceptable returns on your investment.
• Penny stocks tend to be volatile and a 20% movement in price either way is not uncommon. Establish a proper trading plan with stop losses and ensure that you stick with your stop loss to minimize your losses. If the price is moving upwards in your favor, you should consider using a trailing stop loss. In other words, if you buy a one dollar a share in the expectation of seeing the price of $1.20 per share and the price actually reaches $1.30, you can consider moving up your stop loss to $1.20 and protecting your profit.

The stocks can be traded on any exchange though you will tend to find the majority of them on NASDAQ or the Over and Over the Counter Bulletin Boards (OTCBB) because these exchanges tend to have listing criteria that are not stringent. Here are three good reasons why you should take a close look at investing in penny stocks:

The potential for growth. All of the successful large businesses, whether you’re talking about Microsoft or Apple, started life as small businesses and then grew to where they are now. If you can identify and invest in these companies when they are still relatively small, you can multiply your capital at a rate that would be impossible to attain with investments in large companies. It is a fact that large companies tend plateau in growth as they become larger and all of their explosive growth tends to take place when they are relatively small. It is much easier for the $250 million company to double in size than the two billion-dollar company.

The lack of institutional investment. When you talk about the stock market, generally, institutional investors tend to have an advantage when it comes to investing in high-growth companies. They also tend to drive up valuations. However, in the case of promising penny stocks, because of regulatory and other factors, institutional investors such as mutual funds find it difficult to take large positions. As a result, you may be able to find penny stock investments in promising companies directly without having to invest via institutional investors. Because this reduces the cost of your investment, your returns are multiplied according.

The absence of research coverage. Much of the analysis and research that you will see deals with large companies and penny stocks tend to get ignored by the investing community. As a result, if you do your homework carefully, it is possible to spot penny stocks that are undervalued with regard to their potential and you can create opportunities to benefit from their growth.

You should however bear in mind that the disadvantages of investing in penny stocks are the high risk factor and the amount of time that you will have to invest in research. The high risk factor with these small companies is that they may create successful business models when they are small but tend to collapse when they are required to scale up. Being small, they lack the resources to survive a sustained business downturn unless they are exceptionally well capitalized.

So let’s review the first three picks again.

CMLT: CMLT was recommended two weeks ago at it’s closing price of .001. CMLT is now worth .0018 for a 80% gain (not including the intraday fluctuations that could have netted a larger gain). This is down from the 300% from last week. Still a winner.

PTSH: This penny stock was recommended two weeks ago at it’s closing price of .0014. Today PTSH closed for .0015, giving it a gain of 7%. Again we exclude the intraday trading. This covers the 7% loss from last week and gains another 7% to make this a winner.

MIRA: This penny stock was recommended at it’s closing price of .04 two weeks ago. MIRA is now at .03 for a 25% loss. A gain could have been made last week at 12%. But holding out on hopes for more would have been costly.

This gives us a total average, from the first three stocks, of 20.6%. Still a nice little gain for a two week holding.

Now let’s look at the penny stocks listed early last week.

TNRI which closed at .0032 last week, is now worth .0026. This gives a 18.75% loss. Ouch.

SOYO which closed at .4 last week, is now worth .39. This gives a 2.5% loss. A loss, but not devastating.

RPDM which closed at .0027 last week, is now worth .0013. And worst of all, we get a 51.8% loss.

Let’s keep a running 2 week tally from this penny stock list, using their daily picks at random to really determine profit potential. Since we have reached the two week mark for the first three picks, lets assume a low 100$ investment into each pick. After selling, the initial 300 investment would now be worth 361.8.

That means we place 120$ into each of the current three picks.

We will revisit these picks later in the week when they get closer to the two week mark. But now we will introduce the next three.

ZIPI .029

NXHD .0012

MDOR .7

If I had to venture a guess, then I would say that this hot penny stock picks list is nothing but a hype site that spits out random penny stocks. I have yet to see a discernible pattern for their picks and that is why I have withheld the URL until I have determined their legitimacy.

For those who do not know, a pump and dump scam is when a stock is purchased, overly hyped to investors to artificially inflate the value, then dumped by the original owner and originator of the hype. This in essence drives the investors money into the pocket of the ‘pumper.

Well, last week we were given three penny stock picks and I will now review them and see if money could have been made up to this point.

CMLT: CMLT was recommended last week at it’s closing price of .001. Today CMLT closed at .003 for a 300% gain (not including the intraday fluctuations that could have netted a larger gain.

PTSH: This penny stock was recommended last week at it’s closing price of .0014. Today PTSH closed for .0013, giving it a loss of 7%. Again we exclude the intraday trading, but see that .0014 appears to be a cyclic top and less likely to break out. Probably not worth holding.

MIRA: And finally, this penny stock was recommended at it’s closing price of .04. MIRA closed today at .045 for a 12.5% gain. Not substantial, but still a gain.

Overall, if we have diversified investments we would see an average gain of 101.8%. I have to admit that I am intrigued and will continue this experiment by looking at the next three recommendations:

TNRI which closed at .0032 today.

SOYO which closed at .4 today.

RPDM which closed at .0027 today.

On Friday we will take a look at all 6 and see how they performed. If everything maintains this kind of consistent behavior, then we may have some hot penny stock picks on our hands.