Peter Leeds

Many excellent companies trade as penny stocks, and investing in those companies as they “grow up” to become bigger stocks can be extremely lucrative. Unfortunately, penny stocks have been given a bad name among the investment community, and in some cases, that negative reputation is well deserved. But after you discover a few tactics for sidestepping the easily avoidable pitfalls in penny stocks, you can uncover incredible companies that will turn a small investment into a significant reward.

A penny stock is a small company's stock that trades via over-the-counter (OTC) transactions for less than $5 per share. A few consistent traits often indicate that a penny stock has a bright future ahead. You can use these hints to assess a stock quickly, and they can serve as valuable analysis tools for investments of any size.

Technical analysis (TA) isn't just about spotting a bullish indicator but also knowing when that indicator still applies and when the pattern is breaking down. The moment when a TA indicator breaks down, it no longer provides any clues as to future share price direction.Even when TA indicators play out exactly as you had hoped and predicted, their impact will only be temporary.

Investors rely on five categories of financial ratios. Within each category are several calculations to measure the various aspects of a business. You can use each of the following main categories to analyze any type or size of stock: Liquidity ratios: Also sometimes called "solvency ratios," these calculations demonstrate a company's ability to pay its short-term debts and obligations.

Every publicly traded stock has an obligation to provide reports of its operational results. Unless you're dealing with very unprofessional or low-quality markets (and you're not, are you?), reporting of the financials will be mandated by the exchange and be issued on a quarterly (three month) basis.For example, if a penny stock's first quarter runs from January to March, it will report the total results for that period as its Q1 release.

Like all investments, penny stocks can be impacted by investor stampedes. One of the first documented investor stampedes was not even related to the stock market, but that's the point — this is not a stock market issue, it is a human psychology issue.In 1637, in the Netherlands, the people got caught up in a speculative frenzy related to tulip bulbs.

When a company is worth billions, it's more insulated against investor stampedes. The larger something is, the more energy it will take to move it, and the more professional eyeballs there are focused on every detail of the business.In addition, most larger and midsize corporations have been around for decades.

Investor manias are not going away. They've been around for hundreds of years, and they'll be around for thousands more. As long as people want to jump on a trend that could make them rapid money, and as long as they feel competitive when their associates are cashing in, you'll see more penny stock stampedes.Investor manias have now become perfected, due to Speed: Information can flow at light speed now, and that really fuels the penny stock manias from the beginning to the peak.