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Here’s how I buy penny stocks

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Image source: Getty Images Our 6 ‘Best Buys Now’ Shares Here’s how I buy penny stocks The high-calibre small-cap stock flying under the City’s radar Paul Summers | Sunday, 30th May, 2021 | More on: ECK TLY Adventurous investors like you won’t want to miss out on what could be a truly astonishing opportunity…You see, over the past three years, this AIM-listed company has been quietly powering ahead… rewarding its shareholders with generous share price growth thanks to a carefully orchestrated ‘buy and build’ strategy.And with a first-class management team at the helm, a proven, well-executed business model, plus market-leading positions in high-margin, niche products… our analysts believe there’s still plenty more potential growth in the pipeline.Here’s your chance to discover exactly what has got our Motley Fool UK investment team all hot-under-the-collar about this tiny £350+ million enterprise… inside a specially prepared free investment report.But here’s the really exciting part… right now, we believe many UK investors have quite simply never heard of this company before! Paul Summers owns shares in Liontrust UK Micro-Cap Fund and Marlborough UK Micro-Cap Growth. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.center_img Penny stocks are the Wild West of investing. For every company that goes on to multi-bag in value, there are many more that either go nowhere or fail completely. As a result, I only have a portion of my money invested in this part of the market. Here, however, are some of the things I’m looking for.Penny stocks: What’s on my radarPerhaps the most important is the company’s financial position. A penny stock that’s already swimming in debt is one to avoid, unless it has significant assets to offset this. A struggling firm will usually need to tap its owners for more cash by offering shares on the cheap. By contrast, a company with net cash on its balance sheet should have the firepower to weather a few inevitable storms.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…A second thing I look for is a reason (or reasons) why the shares might be ready to rise in value. As much as I invest for the long term, I don’t want to be in a stock that has little chance of growing revenue and profits. The opportunity cost of not investing elsewhere is simply too great. I therefore take a look at recent announcements to gauge whether it could be about to sprint ahead of the competition. Third, I look for evidence of volume. In other words, I need to see that the shares are changing hands (aka liquidity). Should this be the case, I can be more confident of being able to sell my holding when I want/need to. A lack of interest in certain penny stocks could make it difficult to shift them for the price I want.  Another thing I look for is the number of shares owned by directors. If someone helping to manage the firm isn’t confident enough to invest their own money, why should I? Having a healthy slab of shares sends a message to would-be buyers that their interests are aligned with shareholders.A final, more general point I consider when selecting penny stocks is to look across the entire market. Focusing on one sector, such as mining or biotech, is just too dangerous.  An alternative strategyAn alternative to buying individual high-risk, high-reward penny stocks is to buy a fund specialising in this part of the market. Sure, not every holding will actually have shares trading for pennies rather than pounds, but this isn’t the point. The objective here is to diversify risk through buying a basket of stocks. The eventual return might not be as great but investing this way does allow me to sleep at night. Positively, there’s no shortage of active funds to select from. Like penny stocks however, the performance varies wildly. This is why it’s important to scrutinise the track records of those managing investors’ money. We’re talking evidence of consistent returns over five years or more here, not one or two months.I currently have a number of such funds in my portfolio. These include the Liontrust UK Micro-Cap Fund and the Marlborough UK Micro-Cap Growth. Penny stocks in the former include Totally and Eckoh. The latter includes companies like Jubilee Metals.Although there’s no guarantee that returns to date will continue, I’m content to keep my money invested here for the long term. Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. See all posts by Paul Summers Simply click below to discover how you can take advantage of this. Click here to claim your copy of this special investment report — and we’ll tell you the name of this Top Small-Cap Stock… free of charge! Enter Your Email Addresslast_img read more