One relatively simple method for identifying good penny stocks is what I call the Focus Strategy.
This method involves focusing on one specific stock and company.
The goal is to get as familiar as possible with all aspects of the a company that could reflect positively or negatively on profitability.
You see, the more intimate the details and information you have about a company and its stock, the better your chances of finding potentially profitable situations.
Here are some questions you should ask and aspects you want to consider when researching companies...
* Is the stock on a good penny stock market? Nasdaq SmallCap and AMEX require regular reporting to shareholders, while Pink Sheet and OTCBB exchanges are less transparent and restrictive.
* Does the company have a solid business plan and good financial numbers? Are they profitable or are they losing money? What are their forward looking expectations.
* Is there any current bad press about the company or management? This is not a automatic deal killer but it definitely counts.
* Exactly how does the company make money? Are their products and/or services in a growing market? * Are their products and/or services positioned in expanding markets.
* Did the company make any new developments or discoveries in the last five years or so? * Review any current hype the company may be spinning.
Next, you will filter and analyze all this information.
The decision to trade will result from positive impressions you get from your analysis.
Like most other processes, you will tend to get better at this as time goes on.
However, there are a few disadvantages that come with using this method.
It requires a lot of your time and attention.
It also limits you to working with only one to three penny stock companies during any given period of time.
Any more than three and you could easily become overwhelmed.
There is a more efficient and effective solution.
Use a "stock picking service".
Now you will have the ability to execute multiple trades in a shorter period of time.
That's because much of the "due diligence" research footwork will be done for you.
You only need to double-check the service's findings.
Now don't get confused, even if you do decide to employ a stock research service, you still need to learn as much as possible about these small cap stocks.
This knowledge will help you better understand why your stock pick service selects their choices.
Once you decide to take the recommendations of a legitimate service, you should paper trade at least the first pick they issue.
Paper trading gives you the opportunity to check the service's claims.
Do some light research to ensure that the information they report about stocks is accurate.
Review their past stock picking records and ask any questions you may have.
Good services of this type do deep research and keep their fingers on the pulses of many different stocks and companies.
This is what allows them to find hot stock picks.
When they find good hype, there is the potential for profit.
Hype is one of the most influential factors that drive share prices in the penny stock market.
It's part of the market culture and is published in press releases, newspapers, posted to investment blogs, tweeted, posted in forums and other online and offline media.
In an effort to make the stock look more attractive to investors, companies hype and pitch situations and events that might positively impact their stock price.
The overwhelming majority of the stocks you select will be for short term trading.
In this case, short term can be defined as anywhere from a few hours to approximately three months.
In this market, your objective should be to pick likely winners, pull your profits or cut your losses and move on to the next one.