Why you should hold (some) penny stocks

Let’s make sure from the beginning that nobody is misled by the above title. Not all penny stocks are good for long-term holding, naturally. This is why I included that little word “some” in brackets, for clarity’s sake.

The trick is knowing how and when to buy penny stocks and hold them for maximum profit, which is exactly why it’s worth it to take the risk of buying and holding a penny stock.

Naturally, conventional wisdom says not to hold penny stocks. It says to set a moderate goal for profit, like 20–30%, and then short. The problem with this is that if you’ve done your due diligence and picked the right stock, that 30% could be only a tiny fraction of the money you could have made.

Of course, many penny stocks go from pennies to zero as well. So how do you know the difference between a penny stock that has a future and one that doesn’t?

Research is key in penny stocks

I’m a firm believer in the old saying “chance favors the prepared mind.” Naturally, things that are hard to predict occur all the time in any market. However, people who understand the industries in which they invest are surprised much less than people who buy and sell based on emotion.

Penny stocks require much deeper research than higher cap stocks do, by their very nature. You as a savvy and smart investor have to be prepared to go in and dig deeply to really find out what’s going on.

Read the fine print

This means especially, keep on top of what a company is doing. Read their press releases, including all the fine print. Download their investor deck and check it out thoroughly. Find out about the environment in which they operate on a local, regional and national level. Read up on their short, medium and long term plans as a company.

Don’t be afraid to talk to people either. Talk to investors who have already went long on the company. Call them up and ask to speak to the CEO and CFO. This is one thing you can’t do when buying blue-chip stocks!

A great key question to ask people at a company is if any of the people working for the company have invested in it. A high level of this indicates a level of commitment that bodes well for almost any company.

Finally, walk away if you see any of the following red flags:

• The C-levels are drawing disproportionate salaries
• The company has less than six months burn rate worth of working capital
• The company has no clear way to get into the black
• People won’t return your calls or emails
• The company doesn’t have a good website
• Information on the company is hard to come by in any way shape or form