Penny Stock Investing Q and A with OTC Wiki
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The following is a Q&A on penny stock investing with OTC Wiki member and staff writer Otis Wick.
Q: What is the first thing you look at when researching a penny stock, and what is the significance of that piece of information?
A: The first think I look at is market cap. This is the total value of all shares of the company, and thus, the value of the company. Market cap is the single most important piece of information because it gives me a baseline on which to evaluate a company as an investment. The last part of that statement is vital. A company may be well run, profitable, and have a great future but that does not mean it is a good investment at the current share price. Investors need to determine if the market is not recognizing the full future value of a company. I try to determine what I think the company will be worth if they are successful in executing their business plan, and the likelihood that they will be able to do so.
Q: What do you look for in a management team?
A: One thing that makes investing in penny stocks easy is simply looking at who is running the company. It is easy to eliminate many stocks because the people in charge have a poor track record of execution, no background in the industry, or are clearly not the kind of people I trust with my money. Too often, penny stock investors are so excited by an idea that they ignore obvious signs of incompetence or even fraud. Yes, it is true that money can be made investing with sketchy management, but why take that chance when there are plenty of solid companies.
Q: For investors with no background in finance and accounting, what do they need to know about financial statements?
A: Unfortunately, there is a lot to learn about corporate finance and reporting if you really want to understand the nuances of financial statements. However, a few key terms can help an investor determine how risky an investment might be. Cash is king with companies that are just starting out, seek significant growth or have recently changed their business model. Do they have enough cash to get them to the point of bringing in sufficient revenue to cover costs? If not, how will they finance R&D, operations and growth? Investors need to know what convertible debt is and how it leads to dilution and lower share price. Finally, investors should look closely at expenses. Do they seem reasonable and manageable relative to the planning and execution of the business plan? Or, is the company burning cash with little to show for it?
Q: Do you have any advice when it comes to evaluating an idea or business model?
A: Investors tend to focus on the positive and the 'dream' being sold by many companies. Investor presentations will provide many reasons why a company will succeed and why you should invest. I look at reasons why they will fail and how they can overcome these challenges. Sufficient financing and leadership are two reasons touched on above. There are many more reasons including competition, changing technology, government regulation, etc. So, I look at these challenges and determine if the company has already addressed them or is likely to be able to manage them as they come up.
Q: With all the risk, why is it a good idea to invest in penny stocks?
A: Well, it is a good idea for some investors, namely those that have an appetite for risk as well as the time and ability to thoroughly research their investments. Many investors enjoy finding that needle in a haystack and the rush that comes with success. But it really can be an emotional roller coaster and there is a lot to learn in order to consistently find good investments. With each investment, whether it turns out good or bad, you can learn a lot. Applying those learnings to future decisions can make you a successful investor. Everyone will have successful and unsuccessful investments, but coming out on top after many investments makes one a successful investor.