How to Use Analysis to Invest in Penny Stocks - dummies

How to Use Analysis to Invest in Penny Stocks

By Peter Leeds

Doing research for penny stocks (which involves no risk) and actually making a trade (which involves significant risk) are two very distinct activities. Due diligence and your analysis are conceptual. The proverbial rubber doesn’t hit the road until you act upon that research, at which point it becomes very real.

The following tools and strategies can help you make the jump from analysis to investment:

  • Specific triggers: Set a specific target for any penny stocks you’re watching. The target can be price, price-to-earnings ratio, or some other attractive valuation. As soon as the stock hits that target, take action.

  • Past results: The more trading you do, the more you build a history of successes and failures. Consider which analytical circumstances resulted in trading profits previously: You may want to act on them each time you see similar situations going forward.

  • Portfolio balancing: You may decide to buy (or sell) in order to bring your investment portfolio in line with your overall investment goals. For example, maybe you want to have more money in high risk, high reward stocks, or perhaps you want to diversify into new industry groups.

  • Hedging: Hedging involves reducing the risk from one type of investment by buying another that fully or partially acts in a contrary fashion. Suppose that you own a technology penny stock that requires silver to create its electronics and that faces financial pressures whenever silver becomes expensive. You could hedge that investment by purchasing shares in a silver production penny stock that benefits from higher precious metals prices.

  • Situation timing: Sometimes an event arises that creates a compelling buying or selling opportunity. For example, a new government is elected, or a new drug is discovered, or war breaks out. Opportunities for trading and profiting from penny stocks exist in just about any situation.