How to Analyze Penny Stocks

Spend time learning about a company's business record.
i Jupiterimages/BananaStock/Getty Images

Conducting analysis before investing in a company helps maximize returns and avoid disastrous mistakes. Quote information is helpful, but won’t give you the full story. You will need to spend some time learning about the business record for that company as well as their competition. Penny stocks are more difficult to analyze since they are not required to report information in the same manner as stock listed on the Nasdaq or New York Stock Exchange.

Industry Information

The success of your investment does not only depend on the company you support, but its competition as well. Find out if the company has an innovative product or if 50,000 other companies produce the same thing. Learn if this company builds parts for equipment that could easily be replaced by newer technology. See if their competitors are listed on the major exchanges or also trading as penny stocks. Consider the long-term options for the industry as well, if you are considering holding on to the stock for a while.

Company Information

Once you are comfortable with the industry it is time to look more closely at the specific company. Find out how the business is managed, what type of products they produce or services they provide and what their financials look like. Some penny stocks do send reports to the SEC, so it is worth checking there first. Your broker may also be able to provide you with a prospectus if one is available. It may be necessary to contact the company directly for detailed information and to check with the state securities regulator to ensure the company is legally cleared to sell securities in a specific state. Additional resources like Bloomberg or Standard & Poor's Corporate Profiles may have information as well. Do not rely on unsolicited email, blog posts or news releases due to the high frequency of fraud in penny stocks.

Quote Analysis

Many online brokerage companies offer a range of quote applications on their website. There are also quite a few resources for penny stock quotes online. These applications may do some analysis for you and possibly allow you to enter your own parameters. Become familiar with different quote views to find your preference between bar charts, moving averages or candlesticks, for example. The very basic concept of quote analysis is that history tends to repeat itself. If you know what happened right before the stock price changed you may be able to predict the next change.

Risk Analysis

Regardless of the amount of analysis completed or the confidence in an investment, a penny stock will still hold the standard risks associated with any unlisted security. Lower trading volume can make it hard to execute a trade if a buyer and seller cannot be matched. Quote information may be substantially delayed, adding to the difficulty in determining when to place a trade. Large orders or industry news can have a disproportionate affect on the stock price as well.

the nest