As we have seen earlier, penny stocks carry higher hazards and can also give bigger returns. This really means you can either lose serious money by making an investment in penny stocks ( due to the higher risk factor ) or make big money ( due to the higher potential returns ). Which of these happens to you may rely a lot ( although not only ) on how you go about considering the investment. Before we are going further nonetheless, you ought to be aware that whatever how much care you can take there's a certain quantity of risk connected with penny stocks, which is way higher than in the case of big cap, stock exchange registered stocks.
So as to evaluate whether you can earn cash out of a penny stock, you need to understand how one makes cash in the market. One of the returns that one gets from a stock investment is as dividends. That nevertheless is mostly a little portion of the returns that one gets from stock investment. The major returns come from appreciation in the cost of the stocks. The costs of stocks are considered using different yardsticks or parameters. The first of these is the investment return. If the return on a stock is 10% and the price takings proportion is ten, as an example, the stock would be priced in the region of 10 time the revenues or 100 pc of issue cost. To paraphrase this stock would be traded at its face value. From this we are able to see the price would rely on 2 things, the unconditional return and the price-earnings proportion.
The second important factor that impacts on the price is the book cost of the stock, which is essentially computed as a figure that represents the assets available in the company against each stock. For instance, if a company has net assets of $100,000 and has issued ten thousand shares, the value of each share under this strategy would be $10.
The cost of a share is also valued based on a couple of other criteria. But the most vital factor from the market viewpoint is the returns the stock generates. The worth under this strategy would rely on the revenues and the price-earnings ratio. The latter is a matter of perception that will depend upon the risks linked with the stock. This perception will go through changes dependent on the history of performance of the organisation, the available info regarding the company and its prospects, and the market buzz about upcoming major events in the company ( for instance a takeover by a major organisation ).
Of these, the most significant from the long term standpoint is the consistency and quantum of takings from the long run and the direction of the price-earnings proportion in the near term. As a speculator what you want to assess and be conscious of are :
- Is the company stable enough to sustain its takings and expansion? Who are the promoters? How long has it been in business? Answers to these and other such questions
- How is the market perception of the company? How is it sure to change?
- How are the elementals? Does the Corporation have a good financial base? Does it enjoy a good business?
Ultimately , the old proverb don't put all your eggs in one basket is true to a more serious extent in the case of penny stocks. So invest a little at a time and do not put all of your cash on one or 1 or 2 such stocks.