Volatility and risk are inherent in penny stocks. But successful traders still manage to pick out the penny stocks that give profitable trades from the thousands of penny stocks available. Here are the top 3 signs that the penny stock is a potential winner.
#1 Sound Fundamentals
It is best to avoid penny stock companies that are in a sector that is prone to cyclical demand and political pressures. Before investing in a penny stock company, you must carefully analyze the fundamental factors of the company. This would help you to determine why the company is trading at the current price, whether the price is at a fair value, and whether the company has the potential for further improvement.
The fundamental factors that can help you to identify if the company is a good bet are: Company’s debt; Buyout potential; Cash flow; and Porter’s Five Forces of Competition which includes- Competition in the industry; Potential of new entrants into the industry; Power of suppliers; Power of customers; and Threat of substitute products.
A penny stock company with good fundamentals have a better chance of giving you profits.
#2 Good Stage of Life-Cycle
The phase of the life cycle of the penny stock plays a big role in how much reward can be made from the penny stock. There are 5 phases of the penny stock life cycle. They are Pioneering Phase, Growth Phase, Mature Growth Phase, Stabilization/Maturity Phase, and Deceleration/Decline Phase.
The initial phase called pioneering phase will have a lot of small-sized competitors in the space, low customer demand, and novel products and concepts. This is the phase when the stock price would be the lowest.
After this phase comes the growth phase. Here, the companies start to attract greater market attention and have increased sales and demands. This is also when the stock prices start to surge.
After the growth phase comes the mature growth phase wherein there would be an above average growth, but not accelerating growth. Then comes the stabilization/maturity phase wherein the growth is just average. This is followed by the Deceleration/Decline Phase wherein the growth declines as the demand shifts to other new products.
The maximum reward can be made when you invest in the penny stock is in the pioneering or growth phase and exit during the maturity phase.
#3 Sound Management
Since penny stocks are usually newer, smaller, and more speculative, management has a bigger impact on them when compared to other larger companies.
The penny stock companies with sound, ethical, and experienced management are more likely to succeed than the ones helmed by inexperienced and unethical managers. Most of the penny stock companies that had explosive price moves were led by superstar managers.
Good penny stock companies usually display the previous experience of the executives with their career highlights on their websites. It is best to choose the companies that have this information easily available and accessible than those without even a proper website.
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