Penny Stocks: The high-risk, high-reward Investment (Part-2)
How to choose penny stocks that are worth your money.
In the previous article, we discussed what are Penny Stocks are and why they are so risky. In this article, we will discuss some factors to consider when choosing penny stocks.
Here are some factors to consider when choosing penny stocks:
The company's financials: Penny stocks are often traded for less than their book value, which means that the company's assets are worth more than its stock price. However, it's important to do your research and make sure that the company is actually profitable and has a strong balance sheet.
The company's management: The management team is responsible for the company's day-to-day operations and long-term strategy. Make sure that the management team is experienced and has a good track record.
The company's industry: The industry that the company operates in can also affect its stock price. For example, penny stocks in the healthcare industry may be more volatile than penny stocks in the consumer staples industry.
The company's news: Penny stocks are often sensitive to news events. Make sure to keep an eye on the company's news feed and be aware of any upcoming events that could affect the stock price.
It's also important to remember that penny stocks are very risky investments. Even if you do your research and choose the right penny stocks, there is still a chance that you could lose money.
How to select multibagger penny stocks?
Penny stocks are the investment world’s deadly double-edged swords.
While they present potentially the biggest upside potential of any group of stocks, they can also erode wealth faster than any other group.
Also Read: Penny Stocks: The high-risk, high-reward Investment (Part-1)
If you want to invest in multi-bagger penny stock you need to look for these qualities:
Strong balance sheet: Look for low debt, high cash balance, & a current ratio greater than 1 i.e., current assets greater than current liabilities.
High promoter holding: The higher the better. It shows the promoter has skin in the game. Promoters buying shares from the market is a good sign. Avoid companies with promoter pledging.
Quality of the business: Ask these questions. Is it a good business? Are the fundamentals strong? Will it be around after a few years? Is it making profits?
Cash flows: Does the business generate cash from its operations? If yes, then is it growing? How is the cash being used?
Cheap valuations: It’s always a good idea to buy penny stocks when they are cheap. Check if the stock is trading below its book value. A margin of safety of at least 20 per cent below book value is a good entry point.
This is the second part of our Penny stock series. Part 3 on the topic will be published soon.
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