2 Key Strategies for Trading Penny Stocks

Penny stocks can be very profitable. Their low price (less than 5 dollars/share) means that an increase of just a few dollars in price will mean a big percentage gain. They can often make 100% or even 500% gains in a short time period.

Furthermore, since they are cheap to buy, they can be ideal for investors with small accounts. But as with all trading, penny stocks can be very risky. They are notoriously speculative because they represent small or start-up companies that don't have a significant market share. So, it is important to know how to pick the right stock. This article will discuss two key strategies.

First, you want to be able to find companies that show growth potential. With penny stocks, the key word is research! Read up on the company and read the news about the company. Find a company that is a leader in their field. Next, you want to keep a sharp eye for anything in the news that could signal a big move by the company. For example, if a mining company is getting ready to sign a deal to purchase a potentially rich piece of land. If the mining company finds a huge new source of whatever they are mining, that is good news and the stock price will mostly likely shoot up. You want to look out for these nuggets of good news and be ready to buy a penny stock before it makes the big jump. Don't be greedy, especially with penny stocks since they can fluctuate a lot. If the penny stock jumps, say 200%, sell it and bag the profit. Don't hold, hoping for bigger gains. Penny stocks fluctuate a lot so that 200% gain could disappear within hours.

Next, you want to look at how sound the stock is. Price-to-Earnings Ratio, or P-E, is the price of a share divided by the earnings per share of the stock. It is a good indicator of how valuable the stock is to investors. It shows roughly how much each investor pays per share for the profit generated by the company. P/E is one of the most common indicators in the trading world. It is important to compare it to the P/E of other stocks in the market, or those in the same industry sector. If the P-E of your stock is higher, then your stock is more likely to go up in the long term. You should look for a P-E, ideally between 10 and 17. Beware of a stock with a P/E too high though as this could indicate a speculative bubble. In other words, if the P-E is too high, it means that the stock is overvalued. When this happens, sooner or later, the bubble with burst and the stock price will plummet fast. You don't wan to be caught owning the stock when this happens.

Another important concept is called PEG. It stands for Price/Earnings/Growth. We are looking for penny stocks with a low PEG as well as a high P/E. To find the PEG, divide the P-E by the analysts' projected earnings per share over the next 3 or 5 years. A low PEG means the company has great potential for growth and thus the stock will have a good chance of going up over the long term. Traditionally, low PEGs are better, and many pro traders will not consider anything with a PEG over 1.0.

To learn more about penny stocks please visit my web site, Get Rich with Penny Stocks.

Sincerely,

James Hoffmann
http://www.thehoffmannblog.com.

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