Despite its derogatory connotation, penny stocks have big potential for moneymaking if you do it right. This is not the kind of stock that you would easily decide to purchase, just because somebody told you to do so. Penny stocks are very tempting because the share prices are lower than in the major stock exchanges. However, the risks are higher and the market is more volatile.



Although information on the companies selling penny stocks is harder to come by than those on the big boards, if you do your research right and make sure the company is legitimate and investment-worthy, you can make money trading penny stocks.

Check the company's revenue. A company's revenue shows how much it is earning. Many companies that decide to go public for the first time start off by trading their shares on the OTCBBs as penny stocks. If the company is a startup that decided to go public right away, the low revenue would be a matter of course. Another reason for low revenues would be that it is developing new products that have a huge impact on its revenue. Be wary of companies that have been around for a while and yet have little or now revenue something is likely to be wrong with the company. A company's growth should be matched by increasing revenue.

Check the company's earnings. This refers to the company's profits. All companies want to make money and as revenues exceed expenses, there would be earnings. Companies that show profits, have a good cash position, or are heavily funded by external sources are good candidates for penny stocks investment.

Check the company's debt. Many companies in the development and early growth stages usually start with big debts. This is usually due to interest payments that the company has to make. The debt is minimized when the company starts earning, offers shares of stock, or gives significant control to its investors. A company with a huge amount of debt may not be a good investment, unless it has an outstanding product that will allow it to earn well.

Check the company's assets. A company's assets would include the cash, physical property, and inventory that can be turned to money and for which a monetary value is assigned. The more assets a company has in comparison with its operational expenses, the better the picture is. Miscellaneous assets that can be sold to raise capital are also good. You will need to check to make sure that these are really assets and not liabilities.

Check the company's liabilities. A company that has low liabilities in comparison with its assets is a good candidate for penny stocks investment. Ideally, the ratio should be 1:2 of assets over liabilities. This would allow the company to have enough breathing room through its growing pains and in case of emergencies.

Information about the company's financials is important to enable you to make a fairly good judgment about whether its penny stocks are worth investing in. A company's surface picture may be rosy until you start digging in to discover the hidden side. Unless you are able to get enough information, hold back and either do more research, or find another penny stocks company that is a worthwhile investment. Don't invest your lifetime savings until you are sure you know enough about what you are buying.