Know How to Deal With Potentially Lucrative Penny Stocks

Penny stocks are insecurely categorized companies bearing share prices below $5. They, usually, have a market capitalization of $200 million or below that. Because of the risks attached to these stocks, these stocks are often regarded as the slot equipments of the stock market. Any knowledgeable and sophisticated investor would find these stocks suitable for investing his money. But general people who even do not have any idea of these stocks can do well, if they follow the following under mentioned steps.

First of all, one is required to be aware of that penny stocks are well thought-out to be a dangerous investment. These stocks are treated as the most unstable and most manipulated form of assets in the stock market. These companies are lacking in creating a concrete financial performance track record.

You should let yourself get acquainted with large cap and mid cap stocks first and then switch to know penny stocks. You should possess the proficiency of reading and understanding the financial statements of a company which may include a balance sheet, a cash flow and fund flow statement and an income statement. Because before picking any stock, you would be referring to the financial statements, a keen knowledge of understanding them is required of you.

Knowing more about all the detailed aspects of penny stocks would be advantageous for you as it will help you easily handle these stocks. You must study and understand the technicalities at the rear of money and fund flow, capital structure and the market capitalization of these stocks. Attempts should be made for understanding the objective of a public company and the dilution, commonality of scams and loss of investment value associated with these stocks.

Be careful for rejecting the stocks that are not traded on one of the major U.S. exchanges bulletin board or over-the-counter. You should reject the companies which earn annual revenue of $10 million and the company recommended in e-mails and the companies which belong to an industry about which you have no or less knowledge. Keep away from the kind of stocks that take interest in raising money by diluting stocks.
Pick those penny stocks which are capable of consistently generating cash and growing their free cash flow with flow of time. Companies with heavy outsider liabilities should be avoided. Instead of comparing share price, a comparison in regard to share per price is more suitable for knowing the value of a share.