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What To Look For When Investing In Penny Stocks

Aug 17, 2007
The sad fact is that many new investors rush in to buy shares in a stock with little other than a friendly tip from a well-meaning coworker. Imagine how much more effective your venture into stock trading would be if you took the time to actual research that friendly tip rather than leaping into the buying process. Here are a few things you should really look at about a company before investing in their stock and how these things can affect the return on your investment.


The revenue of a company is how much money that company is actually earning. There are many penny stocks that are literally in the development phase and may have no revenues at all or are developing new products that may have a huge impact on the company's revenue and growth potential. You should be concerned about companies that have been around for a while that have little or no revenue. You will also want to carefully watch growing companies that are trending towards new markets to make sure that their revenues are keeping pace with their growth.


Revenues are a hint at potential earnings. All companies share one common goal: making money. As revenues increase and exceed costs the magic begins to happen. Positive cash flow can have a wonderful effect on penny stocks because investors notice them and realize they are on their way.

Penny stocks must be heavily funded by external sources, have a substantial cash position, or positive earnings in order to fund ongoing operations and expansions, maintain status quo, and/or take advantage of certain strategic opportunities for growth.


Many companies find themselves encumbered with significant and occasionally cumbersome debt during the early growth phases and start up processes. These can detrimental in many ways. One of these ways, which is almost immediately noticeable, is the cut of profit that interest payments seem to stifle.

Creditors may also choose to collect on the entire debt sometimes, which can cripple an operation. And then there's the issue that some creditors like to exhibit a great amount of control for the businesses they fund, which leads to a massive struggle between the control of the bank and the independence if business owners.

Until a company is established enough for the income to exceed expenses, debt will continue growing. This of course will not hold true if the company offers dilutive stock offerings or gives up a significant amount of control to investors.


The assets of a business include all of the cash, inventory, and physical property that a company owns for which a monetary value can be assigned. The sum of a companies assets can provide an excellent picture of the overall health of that company. For example a company that has $1 Billion worth of assets and is only $100 Million in operational expenses should be able to meet their expenses for a while.

Also a company that has many miscellaneous assets that could be sold in order to raise capital it could also be seen as a solid investment. Be careful that you confirm the value of those assets and are certain that those assets are not actually liabilities.


While the things of value owned by a company are its assets, the things that cost the company money or impair growth would be considered liabilities. The lower this number, the better investment potential the company is. It is very important that you never choose to invest in a company that has greater liabilities than assets. The goal is to find a company with at least a 1:2 ration of assets and liabilities in order for that company to have a fair amount of breathing room for emergencies and growing pains that will arise.

If you do not have at least this minimum information about a company, then you are really not ready to invest in that particular company. While it's great to jump in and get things going, it is even much better when you can start out with a mark in the win category rather than a loss. The surface picture of a company may seem rosy always do a little digging to see what you come up with before taking the plunge. Never be afraid to study potential investments before you buy.
About the Author
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