I started stock trading a few years ago when I left my day job.
I started with blue chip stocks but I discovered it takes more than the few thousand dollars I had in savings to make a living trading blue chip stocks.
I needed to start making money fast so I started trading penny stocks.
It took a lot of courage because all I was hearing was risk, risk, risk! But my success in trading penny stocks has proven that sometimes big investment returns can come in small packages.
Let me tell some of the things I do that has helped me to succeed.
Start by getting information.
There are thousands of companies within penny stocks, with a wide range of industries and services.
Information is your greatest ally when it comes to choosing winners amongst micro-cap stocks.
You must be up to date with consumer and industry trends, technological advances and changes in consumer tastes.
Find out if the company has developed a great product or service that can generate good income in their niche in the market place.
Does the product or service have a future? Will it still be in demand with future changes in consumer lifestyle and economic trends? Most penny stocks are not being traded at their full values giving experienced investors a chance to exploit the price inefficiency and make a killing.
It takes more time an effort to analyze a small company because there are fewer published reports.
They rarely enjoy regular research coverage by analysts.
Assess the company's current stock price against its 52-week high/low trading range.
Look at valuation ratios, such as the price/earnings multiple or price/book multiple, to see if the stock looks cheap or expensive.
Check how much net profit the company is making on revenues, how high debt levels are compared to the company's capital.
Take a good look to know if the company is making or losing money.
Make sure that the company files financial reports with the SEC regularly and on time.
Also find out if there are auditing issues.
However it is more important to put your effort on understanding the company's business strategy and business model, ensuring the management team is the right one to pull it off, making certain the industry in which the company operates is sizable and growing, and judging how or whether it is better than its competitors.