How to pick best penny stocks?

Read on to find out how to pick penny stocks and earn good returns

Penny stocks are low-cost stocks that do not require much financial investment. Such stocks generally belong to companies that are new or have low market capitalisation. Many investors are keen to buy penny stocks because they are affordable. However, to benefit from them, investors should know how to pick a penny stock.

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What to keep in mind while picking penny stocks?

• Knowing the financial history of the company is a must for penny stock investors. Small companies may not have much of a financial record, so it is crucial to find out about their financial merit and solvency level through some other channel.
• Since penny stock prices can be very volatile, investors should ideally have some market knowledge or seek guidance from someone with the requisite know-how.
• Penny stock trading is not something one should put all their savings into because it is not the right method to make money fast. While investing in penny stocks, good returns may come only after a significant wait. 

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• For those who buy penny stocks, it is always best to start with low investment and focus more on good trading while concentrating on penny stock tips in India.
• Because of the high risk involved in buying the stock of small companies, prospective buyers should only invest an amount that they can afford to lose. One must have a financial cushion to bear temporary losses.
• Investors in penny stocks should be thorough with the intricacies of trading. Penny stock market is a fluctuating one, and making money on it depends on knowing when to sell the stocks. Not selling them at the right time is sure to lead to losses.
• There are online brokers’ platforms with a range of penny stocks, from which investors can purchase stocks of their choice. 
• It is best to invest in penny stocks in two or more sectors instead of sinking all your money in similar companies.

What to avoid while choosing penny stocks?

Investors should also know which penny stocks to avoid. When seeking advice on how to choose a stock, be careful to avoid these:

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• Stocks that have low liquidity should ideally be avoided. These are stocks that cannot be easily sold. As they are not popular, you may find it difficult to find a buyer. Sometimes, as a result, you may have to sell the stocks for a considerably lower price.
• There are stocks known as pink sheet stocks that trade over the counter (OTC). These stocks cannot satisfy the requirements needed for getting listed on major stock exchanges. Though some of these stocks may become lucrative in the long run, a thorough background check has to be done before investing in them.
• The price of some stocks is boosted rapidly by a method known as ‘pump and dump’ where the promoters of the company inflate the price of the stock by providing false statements and exaggerated claims. These, too, need to be avoided. 
• It may not be very easy to identify dubious stocks, but if a person investing in penny stocks gets recommendations via email or other means urging them to invest in a particular penny stock, it is a hint that the stock is probably not genuine.