Penny stocks are risky, and you should do your research before investing. But if you know how to find the winners, penny stocks can offer a huge payday. Penny stocks are cheap, but they can grow quickly when more investors notice them.
To find penny stocks that will explode, you need to look at several factors. In addition to basic research into what types of products or services the company offers, it’s important to look at other financial data like earnings reports and debt load to ensure the company is stable enough to survive a downturn or disappointing product launches.
8 Rules to Find Penny Stocks Breakouts
Rule 1: Know what you’re looking for.
When looking for penny stocks, know exactly what you’re searching for. A “penny stock” is any stock that trades for less than five dollars per share. However, the term generally refers to small companies that don’t have much information.
These are typically found on the Over-the-Counter (OTC) Bulletin Board or Pink Sheets and are traded by individuals instead of large financial institutions. Both of these exchanges have low listing requirements, making them more susceptible to fraud and manipulation, making it important to do your homework before investing in a company that trades there.
It’s also important to know what a penny stock is and what it isn’t. Most investors think that if they choose a cheap enough stock, they will be able to make huge profits quickly without any risk of losing money; however, if you fall victim to this scam, then you will likely lose all or most of your investment in a short period due to high volatility caused by market manipulation practices such as pump-and-dump schemes (when someone artificially inflates demand).
Rule 2: Avoid companies in trouble.
When looking for micro-caps, it’s a smart idea to stay away from any companies that might be in trouble with the SEC (Securities and Exchange Commission) or have been suspended. The SEC takes action against publicly traded companies that don’t follow their regulations.
It’s also a good idea to avoid companies that have had to restate their earnings. That means they gave out information that turned out to be inaccurate. You can find this information on the company’s website or by using Google News.
In addition, avoid companies with a high debt-to-equity ratio (a financial measurement of what percentage of company assets are financed through debt.) When you see these red flags, move on and look elsewhere for stocks that will do well in the future.
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Rule 3: Avoid pump-and-dumpers.
Avoiding pump-and-dump schemes is one of the most important rules in penny stock investing.
Pump-and-dumpers often use spam emails, newsletters, and social media to convince investors that a stock will soon explode in value.
These scammers buy the stock and then send these messages out to people so they can sell it at a much higher price after the price increases from the demand created by all those emails and posts.
Rule 4: Investigate the company and its team.
It is important to learn about the team behind a penny stock before investing. The way to do that is by closely evaluating the backgrounds of the CEO and other key members of management, as well as how long they have been with the company.
Another good idea is to find out what other companies they have worked for in the past, what their skills and experience are in their field, whether or not they have been involved in any major scandals if there has been an unusually high turnover at any point, and what plans they have for growing the business.
You can usually learn this information by looking at a company’s website or blog, reading investment reports written by stock analysts at large brokerage firms (like Merrill Lynch), and consulting reliable news sources on Wall Street (like Barron’s).
Rule 5: Look at the financials.
Although a company may have a large market share, it could still struggle financially. A good rule of thumb is to never purchase stock in a company losing money. If you see starry-eyed investors touting a penny stock as the “next big thing,” do some digging and look at the financials yourself before investing.
Also, consider how much debt the company is carrying. Confirm that any acquisitions or expansions are successfully helping them earn more income. It can be easy to become excited about financial growth in one area of the business (say, product sales), but if there’s no growth in the bottom line (profit), then it doesn’t matter how many widgets they’re selling—you shouldn’t invest your money in them.
Rule 6: Look at the corporate structure.
The corporate structure is a complicated, interconnected web of shareholders, executives, and investors. Each one can have a significant impact on the price of the stock. Keep an eye out for these red flags while you’re researching:
- Shareholders with significant voting rights can impact a company’s growth. Look to see if the majority shareholders are looking to exit the company. If they are, this could signal that they think its future is not as bright as it may appear.
- A board of directors should be individuals who help make good decisions for your investment dollar. The board should also be made up of experts from various fields that help push your investment in the right direction. The C-suite (or management team) is responsible for implementing those ideas into action using your money.
Rule 7: Check out the news coverage.
Now that you’ve got your checklist handy, it’s time to move on to the second step. This one requires you to do a little bit of research. To find penny stocks before they explode, you’ll want to check out the news coverage. Look for articles in places like Forbes and Business Insider. Sometimes, even Yahoo Finance will cover some of these potential big hits.
But keep your eye out for articles around the company or product on other sites as well—they can give you a clear idea of how much attention that company is getting.
The more attention it gets, the better your chances are of having an investment pay off. If there’s only one article about it, don’t worry too much, but try to find others before deciding whether or not to buy any shares.
Rule 8: Find the trading volume and price volatility of the stock.
You are looking to determine two factors: the trading volume and the price volatility of the stock. Trading volume is how many shares of a particular stock trade over a certain period. The greater the trading volume, the more opportunity to sell your stock at or above your purchase price.
Price volatility is how much the price swings up and down over time. If you buy an oil stock for $2 per share and it trades as high as $12, you have made 600% on your initial investment. However, if it falls back below your purchase price, you will have lost money on this investment.
Penny stocks are volatile due to their lower market capitalization (how much they are worth).
How To Find Penny Stocks Before They Explode? [WATCH VIDEO]
Penny stocks have been around since the beginning of time. The concept is simple: buy a stock for a fraction of what it is worth. Then, wait for it to explode in value.
The problem with penny stocks is that they are often scams. You can easily lose your money if you don’t do your research before buying any stock.
But there are ways to find penny stocks before they explode without risking your hard-earned money. Here’s how:
- Find A Penny Stock That Is Undervalued
- Look At The Charts And See If They Have Been Going Up Or Down In Value Over Time
- Check The Company’s Financials And See If They Are Making Money, Paying Their Employees On Time, And Not Taking Out Millions Of Dollars In Loans From Banks
- Look For Companies That Have A Product That Is In Demand By Consumers (For Example, A New Product Or Service)
You can also find more undervalued penny stocks by doing the following:
1. You can set Up a Stock Scanner
Every day, lots of penny stocks are traded in the United States. You’ll have to filter it down in some way. You’ll need to know where to look for high-potential penny stocks. That’s when your stock scanner comes in handy.
You may rapidly search the full universe of penny stocks with the correct scanner to find the parameters that suit your trading strategy.
Note: Stock screeners are most likely your best choice for narrowing down the universe of stocks to locate one that fits your trading style and risk tolerance.
You’ll create your criteria for weeding out stocks over time. Volatility surges, news articles, higher volume, and prior large moves are some of the things traders watch for.
2. Take advantage of chart patterns
Next on our list of strategies on how to find penny stocks before they explode, chart patterns.
Chart patterns may aid in the development of a trading strategy so that you’re prepared to take advantage of an entry point if and when the stock fulfils your expectations. It’s time to get down to business when you’ve limited down the various stock options to a small, manageable list.
Now it’s up to you to identify the deals with the lowest risk and the most potential profit. On the chart, price and volume patterns might provide information about a stock’s current state. As you get more proficient at reading charts, you’ll begin to see how traders respond to enthusiasm, greed, and critical levels.
3. Have a good arsenal of indicators
Every trader has a set of indicators that they prefer to use. Examine as many as you can to see which ones will work best for you. The majority of traders will begin by studying chart patterns. However, to establish a stronger argument for a trade, it’s a good idea to utilize technical indicators to make sense of the chart.
4. Carry out your research
Laziness is a major reason why most penny stock traders fail. They refuse to conduct the research that my students are taught to conduct. They want someone to tell them what to do, but I don’t educate them in this manner. I’m not going to offer you any fish. I’d want to show you how to fish. You’ll be able to discover how to find penny stocks on your own this way.
You may be aware that a certain penny stock has previously risen in response to the news. You’re fairly certain it’ll surge, so you buy a large number of shares. Hard effort and determination are required for success. It necessitates the capacity to accomplish what others will not. Planning isn’t enjoyable, but it’s important.
5. Keep an eye out for breakouts and rallies
It is common knowledge that stocks tend to consolidate before going for an extensive rally.
I search for stocks that have the potential to break out to new highs, particularly those that are still up on the day and have morning highs.
There’s always the possibility of a short squeeze into the close if you see a play like this on a Friday afternoon and the stock is still holding its morning high.
Short squeezes are a strategy that all penny stock traders should be aware of. When prospective breakouts hit new highs, they may struggle to keep their price above the previous resistance level.
6. Pay attention to basic price action
The true narrative about a stock is revealed by price movement. All of the news outlets in the world will not tell you when these events occur, but a stock chart will. Price fluctuations may be informative, believe it or not.
It may appear tedious at first, but you will begin to notice patterns that you would not have noticed otherwise. Which direction do you believe the stock price will go next? When you’re certain of your abilities, begin betting modest amounts of money on your forecasts.
7. Social Media Channels
Social media channels like Twitter and Reddit can be useful for finding penny stocks before they explode because many companies will announce major news through these channels first. If you’re looking for a particular company’s social media channel, On Redding you can follow subreddits like r/wallstreetbets, r/stocks, r/pennystocks, r/investing, r/Wallstreetbetsnew, r/UndervaluedStonks, r/greeninvestor/ while on Twitter you can follow the following accounts: Reapertrades, InvestorsLive, FousStockPicks, CodyTrades, JohnWelshPhD, Geckler, and AlphaTrends
Other ways to pick penny stocks
Two major strategies come to mind. They include:
- Fundamental analysis
One of the most significant and necessary strategies for evaluating companies’ critical financial data, market scenarios, political and economic trends, and many other variables. The revenue and earnings of a firm and its growth tendencies throughout time may give a lot of information about its performance.
- Technical analysis
This type of research allows investors to compare stock prices and trading volumes over time to see how a specific stock compares to its peers. It’s important to remember to invest within your limits and stick to your investment strategy regarding penny stocks.
To avoid falling victim to penny stock scammers and to build your own personal penny stock success stories, disregard any supposedly hot penny stock choices offered to you by e-mail or based on recommendations from friends.
What are penny stocks?
A penny stock is a stock that trades for less than $5 a share on major exchanges. Penny stocks are shares of stock that trade for less than $5 a share. With shares priced under $5, Penny stocks have a higher level of volatility, but they also offer bigger profit potential.
To be honest, learning how to find penny stocks before they explode is an art. Why? If it were that easy, everyone would walk the street as millionaires and smile at their banks.
Some penny stocks are traded on larger stock exchanges such as the NASDAQ or the NYSE. However, many of them trade on over-the-counter (OTC) markets. OTC exchanges are not subject to the same strict requirements as larger exchanges. While this makes it easier for a small business to get listed, it also increases the risk of fraudulent conduct.
Mastering the fundamentals of stock research is the most effective and challenging way to learn how to find penny stocks before they explode. Before buying penny stocks, professional stock traders utilize a variety of methods to qualify individual shares.
That is one of the factors that deter many investors from investing in penny stocks. However, as you will soon discover, there are still possibilities to profit from penny stock price increases. And, no, you are not required to trust the firms.
What you should know
- Penny stocks are firms whose stock values are frequently less than one dollar.
- Because major stock exchanges, such as the NYSE and NASDAQ, have listing requirements that must be satisfied, including a minimum share price, penny stocks frequently trade outside the major market exchanges.
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How do beginners invest in penny stocks?
Before diving into more core specifics on how to find penny stocks before they explode, let’s take care of this detail.
Penny stocks are often the first natural stop for many new investors. As the name implies, Penny stocks trade with a cheap share price, generally less than $1.
It’s easy to see why beginners get sucked in by the idea of investing in a firm for a few cents and then selling for a tidy profit when the price rises into the multi-dollar range.
Because of the incredibly cheap pricing, an investor may hold thousands of shares for a relatively little amount of cash. With that size, a few pennies per share gain may result in large percentage profits.
Advantage of Trading Penny Stocks
Penny stocks are a big part of life for some traders. But, in the grand scheme of things, they fly beneath the radar.
You must understand this to learn how to locate penny stocks to trade. That is one of their most significant advantages, but it is not without danger.
Let’s start with the nice things. Trading large-cap equities, often known as penny stocks, pits you against hedge funds, banks, and multibillion-dollar corporations. You’re not going to be able to outwit them, no matter how hard you try.
Trading penny stocks usually pits you against novice retail investors. Even a simple trading strategy may put you ahead of the competition.
Drawdowns of trading penny stocks
Without discussing risk, a talk about how to find penny stocks before they explode would be incomplete. The same volatility and rapid movement that might help you develop a penny stock account quickly can also destroy it quickly if transactions go against you.
It is critical to recognize the dangers involved. Because most institutional investors, such as mutual funds, index funds, and money managers, are prohibited by law from trading penny stocks, these securities are typically unpopular among investors. As a result, liquidity is a major problem.
Note: Penny stocks are not recommended for long-term investment. The nature of these small and occasionally shady enterprises dictates that most penny stocks will eventually collapse.
They can, however, make some significant moves before finally failing. You can take advantage of those changes in the near term if you’re ready. As a result, most penny stock traders concentrate on short-term movements, entering and leaving positions fast.
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How to find penny stocks before they explode: Conclusion
This wraps up our article on how to find penny stocks before they explode. Most retail traders neglect underlying factors like the number of shares outstanding when examining a penny stock.
As with any investment, it’s essential to assess a company’s fundamentals and overlay this data with specifics, such as how diluted a company’s shares are due to stock splits, stock options, and new shares to create cash.
These are often small-cap equities that are prone to high volatility. Investors can identify winners by keeping an eye on the share structure and the other fundamental criteria outlined above.