How to spot high yielding good penny stocks

Spotting good penny stocks is the holy grail for many investors and traders (and for many good reasons too). A lot of folks favor penny stocks as you can invest in penny stocks with a small investment and sometimes expect great rewards in return. You must be warned though that with great reward comes great risk as well and many people have suffered the pitfalls of high risk investments. All things being equal, in order to make money with penny stocks as some do, you must focus only on good penny stocks that offer clarity and crucially employ a mimimum loss and maximum profit strategy.

If you think implementing such a strategy is difficult, then you are right, it is. We all know how the stock markets have stripped so many folks who thought that they were too smart. The stock market is infamous for stripping bare naked countless number of investors, irrespective of where they choose to invest; super-cap size or medium-cap size or small-cap size or an even smaller micro-cap size companies. Ironically, inspite of everything, some of the greatest wealth is generated, on a regular basis, on these same stock exchanges. Thus we know that as long as you can strategically manage risk, you can effectively keep your losses low and increase your gains.

So below are some guidelines I employ for selecting good penny stocks and creating an effective risk management policy. These tips are a great paradigm to follow and I have found them to work with companies of different capitalizations. I just favor penny stocks because they offer the ability to generate first-class profits with significantly lower cash and the same amount of labor.

1. Information is key to picking up good penny stocks. The biggest problem with spotting great penny stocks is that there isn't a lot of information easily available about them. Remeber, the more you know about a company, the better you can assess your risk and risk management is one of the key components in minimising losses and maximising profits. And if the data of a particular company is really hard to come by then the best thing to do is skip it. The fact of the matter is that there are tons of penny stocks out there, so it is better to focus on the ones which offer clarity rather than the ones which don't.

2. All stocks, penny or otherwise respond with respect to certain events popularly known as triggers. Equities are influenced, upwardly or dowardly, in anticipation of the news flow surrounding them. Pay careful attention to the word "anticipation". Now this is very important. Buying a stock post the event causing the news flow can be dissapointing because by the time the event comes to pass the stock would have already done its bit. In fact, the period of time just after the event in a penny stock can be very risky as investors and traders book profits aggresively especially if they have made good gains. So, when trying to pick good penny stocks be alert.

3. The process of discovering good penny stocks goes deeper than doing a company and news flow analysis. It also involves determining key data points like the entry price, exit price and the price of the stop loss for protection (in the event that the stock behaves outside your expectations). Without a stop loss your risk will be unlimited and thus it is key. You will be able to determine these data points by looking at the technical charts of the penny stock you are interested in. Pay special attention to trade volumes as they speak volumes. If the company has only recently floated on to the exchange then these data points are extremely hard or impossible to plot. So it is best to stay away.

I am sure by now you grasp that investing in penny stocks and other securities is quite complicated. Cherry picking good penny stocks requires good experience and know how, all of which takes time. But there is a solution. The wiser thing to do is to trade alongside a successful trader who can back himself up. In this system you would let the expert discover good penny stocks and advise you on when to buy and sell, thus piggy backing on his or her expertise for spotting top performing penny stocks.