Penny Stock Investments - Are They A Worthy Addition to Your Portfolio?

Penny stock investments are the rising stars in the investment community and for good reasons, too. These shares of stocks, which are also called small caps, nano caps and micro caps, are affordable to the masses considering that most will sell for under a dollar per share although it must be emphasized that these stocks are usually sold in chunks.

But micro cap stocks also have high risks that will make anybody think twice about investments. Penny stocks are subject to low liquidity, high volatility and limited reporting requirements imposed by their trading venues, usually the OTC Bulletin Board and the Pink Sheets. The good news is that there are great ways to counterbalance these high risks so that the great benefits of penny stock investments can be enjoyed. Here are just a few of these ways.

First and foremost, you must ensure that the issuing company is a legitimate one. You absolutely want to avoid being taken for a song and dance by a fraudulent company run by a single person from a dirty garage with no other intent but to take the investors' money and take a run for it. Unfortunately, not all companies that started in garages or dorm rooms like Microsoft and Facebook go on to become great ones - many are just plain frauds.

We suggest researching about the company through government agencies. The Securities and Exchange Commission should have data on the company's date of establishment, board of directors, and other relevant information including addresses and contact numbers. The financial statements filed by the company may be dated years ago or may contain tons of lies so beware about hastily making penny stock investments on the basis of the completeness of basic information presented.

When you have found a legitimate micro cap company with reliable financial statements, your next step is to look at its past, present and future finances. Its past finances will reveal how well it has handled the investors' money with the earnings per share growth rate, the return on equity and the debt-to-equity ratios as the most important numbers in the determination of good management.

The company's present state of finances is also important to ascertain how fast and how much it can afford to pay its investors in the event of pullouts. You must think well into the future even before a single cent has been poured into the penny stock investments because of the high risks involved. In fact, forecasting is an effective tool that anybody desiring to profit from penny stocks should possess.

You should also look at the distribution of the shares among the stockholders, if said data is available. When you observe that the shares are concentrated in the hands of just a few individuals, then you had better start running in the opposite direction, in a manner of speaking. This is true even when the company's financial health appears to be in top form.

You may just find yourself holding on to useless shares with no buyers. How did that happen? Well, when you invest in the stock, heavy selling ensues but the prices on the stocks rise so much so that no buyers are willing to risk it.

Indeed, penny stock investments are good investments to build your wealth. Just be sure to learn how to do it right.