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HomeSTOCKSHow Do You Analyse Best Penny Stocks?

How Do You Analyse Best Penny Stocks?

Penny Stocks

Investors who are cautious about risk and fear losing their money should avoid penny stocks. But, this doesn’t necessarily mean that penny stocks never lose. Every once in the course of time it is possible for a penny stock to win.

The investors willing to risk their lives in the volatile and unregulated realm of penny stock can look into crucial financial ratios that can help mitigate risk and may even be able to be a wise investment.

How to Pick Penny Stocks?

Here  is an easy guide to choosing the best penny stock:

Understand the Conditions of the Market

Since the price of the penny stock is fluctuating, you need to follow certain financial experts or stock advisors, as they know the industry well. With their help, you can avoid stumbles and reap impressive profits.

Check if the Penny Stock is Right For You

It is true that there are penny stocks that are sold at bargain prices, but they can rebound and grow in the near future. Thus, you should place your money in penny stocks only with money that you can manage to lose.

Research the Company

There can be a variety of misleading ads by means of fake and false information created by those who purchase large quantities of stocks. This is why you should always investigate the company with financial experts.

Understand the Valuation and Price of Shares

The value of its stock will inform you about the company’s present worth in the marketplace. Before you invest in the penny stock market, you can examine the financials of the business, and assess its value.

Practice Day Trading on paper Trading

Before moving on to penny stocks, you should do some real-world experience to understand more about the practices of trading.

Paper trading is generally a method to comprehend the trading strategies and determine if it will have been paid for or not in the real world. It is possible to test this by using demo accounts and can practice this with demo accounts.

Avoid falling into the trap of Constant Dilution

When a company issues additional stock, it decreases values of those shares of current investors as well as their ownership of the business. Thus, you need to be aware of the effect of dilution in the worth of shares.

Understand Your Investment Horizon

Before you invest, you first need to know the evolution of funds in a specific moment. The past few years have occurred occasions of prices being controlled in small-sized stocks.

The most important thing to remember is that your investment should be in line with your specific goals and should concentrate on the right information.

Monitor All Your Investments Regularly

When you invest in specific stocks or funds, it is advised to conduct an annual review of your fund every few months.

You should examine the fund to determine the way in which its administration and implementation are carried out in line with your set goals.

Financial Ratios for Penny Stocks

With sufficient financial transparency, we can apply some of the same analytical techniques we employ for larger corporations to determine if a penny-stock is worth our investment money.

Positive numbers and positive trends in the income and balance sheets as well as the cash flows statement are essential because a significant portion of the value of penny stocks is dependent on the future expectation of its performance.

Liquidity Ratios : Liquidity ratios (such as the current ratio, quick ratio cash ratio and operational cash flow) are the first ratios that investors should determine to evaluate penny stock. A lot of penny stocks are in a position to not cover their short-term obligations in the timeframe they are in. Lower liquidity ratios (say lower than 0.5) are a good indicator that the business is struggling to remain in the market or expand its operations.

Leverage Ratios: A different segment of measures are the ratio of leverage. They are like liquidity ratios in that they concentrate on the ability of a company to repay the cost of debt. In this instance this is longer-term debt we are worried about. Two key percentages of leverage are the debt ratio and the coverage ratio.​

If it is growing, then this should only be in the interest of aiding the growth of future opportunities and business growth.

The ratio of interest coverage is calculated to determine if the debt burden is feasible and if the business generates a sufficient amount of income to service the debt.

The higher ratios of coverage for interest are more favourable. Anything lower than 2 suggests problems in paying for long-term debt in the near future.

Performance Ratios: Performance ratios (such as the gross profit margin, operating profit margin, net profit margin and return on assets as well as return on equity) aid in quantifying the amount of money earned at every level of the income statement of a company. The problem is that margins for profit of small-cap stocks are usually very minimal in the beginning phases of growth. A steady and healthy increase in operational earnings is essential in the situation of penny stocks.

Valuation Ratios: Lastly, valuation ratios can help us determine the appeal of the stock at the current price. Stocks that are priced at pennies can be very overvalued. The most commonly used ratio to measure the value is Price-to-earnings (P/E) proportion.

In general, a lower ratio of P/E is a sign of higher value-for-dollar of earnings. The ratio however can be meaningless if earnings are negative or nonexistent and negative, which is usually the case for penny stocks.

A better measure of penny stock value is the price-to-earnings-to-growth (PEG) ratio, which incorporates the company’s annual earnings growth rate into the above equation.

It is calculated by dividing the ratio of P/E by the anticipated annually rising rate in earnings per share (EPS).

If the growth rate estimate is accurate and reliable, the PEG ratio is an excellent indicator of the worth of penny stocks because a significant portion of their value is in the expected future expansion of profits of the business.

Like we said PEG and P/E ratios are ineffective when earnings of a company are negative or zero. In this situation, we can use the price-to-sales ratio and the price-to-cash flow ratio which are much more efficient for penny stocks.

A ratio of price-to-sales of 2 or lower is generally regarded as a good share price.

The ratio of cash flow to value is an expression of price-to-sales. It is especially helpful to calculate when the quality of earnings is in question.

When these ratios are established, we can compare them with similar ratios for the preceding reporting period, or forecast ratios for the future.

We can also examine these ratios against the ratios of directly-related competitors as well as the general market for valuable insight into the value of the business’s performance.

Key highlights 

A few important things to keep in your head prior to making a decision to invest in penny stock are:

  • Choose stocks of companies that are listed on OTC markets. OTC markets. The OTC market is traded in the international market and has stricter standards of financial reporting for companies that are listed.
  • Avoid the Pink Sheet Stocks. The shares are more prone to manipulation because they are not listed in BSE, NSE, or any other stock exchange in India.
  • Beware of the dump and pump stocks. A lot of OTC stocks are sold on the basis of false and misleading claims and offer an assurance of high yields. However, these kinds of stocks only open in IPO and are not in markets for penny stocks.
  • Avoid penny stocks with low liquidity. stocks.
  • Concentrate on trading and stay the investment levels low.
  • Be aware of when you should know when to sell your penny stocks, and make fast gains. Don’t overtrade.
  • Before you invest in shares in the company, you should know more about them.
  • Make trades for penny stocks using money you can afford to lose. you can be able to afford losing.
  • You should diversify your penny stock portfolio in at least four different industries.

The Bottom Line

Penny stocks fluctuate in value according to demand from trading, and are typically only in loose relation to fundamentals of the company and its balance account. It is usually impossible to determine the correct intrinsic value.

The prices are extremely volatile and reflect the perceived value over the actual value. The level of disclosure for companies is at best average, and most of the time, not even.

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