Canadian penny stocks are more speculative than better-established firms because they’re usually involved in riskier ventures, such as finding mineral deposits that can be mined at a profit, commercializing unproven technologies, or launching new software. Because success is so rare in these endeavours, it’s all the more important to focus on investment quality when you’re looking for the right Canadian penny stocks to add to your portfolio. Words: 475
The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article by Pat McKeough (tsinetwork.ca)
While it may seem contradictory to use the terms “investment quality” and “penny stocks” in the same sentence there are even wider disparities in the investment quality of penny stocks than in better-established companies because, while it’s hard for any new company to grow into a profitable business, it’s even harder in pioneering fields, where most penny stocks operate.
Here are 7 keys to greater profits in Canadian penny stocks:
1. Look for well-financed companies with no immediate need to sell shares at low prices as that would dilute existing investors’ interests.
2. High-quality penny stocks should have strong balance sheets with low debt and, even better, have a major partner who can finance the penny stock’s mine to production, or it’s product to market.
3. An experienced management team with a proven ability to develop and finance a mine, product or service is another key ingredient.
4. Avoid stocks trading over the counter, where such things as regulatory reporting are lax.
5. Avoid stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
6. Compare the market caps of the stocks with the estimated value of their assets or future earnings streams. Some need to quickly find a mine or successfully launch a product to justify the current share price and avoid collapse.
7. Above all, automatically rule out investing in companies that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on finding a mine, or developing a saleable product or service, rather than hyping their story.
Buying penny stocks can pay off extremely well when it succeeds but, in addition to the business odds against success, it’s much easier to launch and promote a stock than it is to find a mine, for example, or invent a new battery. That’s why penny stocks are so common, even though profit-making companies are rare. It’s also why we think penny stocks should make up only a very small part of your portfolio.
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