How Stock Investing Works

Many stock investing experts believe that penny stocks are worthless, that investing in small-cap stocks is dangerous and that investors should avoid them at all costs. This view is valid in various respects, except that you are throwing the baby out with the bathwater by completely ignoring penny stocks. Applying yourself to analyzing small-cap stocks through identifying excellent small companies can reward you richly. You may discover a future giant. You see, the "enemies" of penny stocks do not take into account that gigantic companies whose shares are now all-time "blue chips" once started as penny stocks.

When buying stocks, you purchase shares of a company. This company has decided to expand its activities and to do that it needs money. One way of obtaining funds is to issue shares. The company has to be listed on the stock exchange, where the claims of all other listed companies are traded. Despite fluctuations, the share price of a successful company usually rises, but it can also drop when the company, for instance, does not show a profit. The cost can also decrease if the stock market has a downturn, often the result of broader economic problems of a national or international nature. Sometimes a share gets a pounding because the market sector in which it operates suffers a drawback. Over time, however, the share prices of large, successful companies have risen dramatically, earning their shareowners huge fortunes. Today financial analysts show figures that confirm that stocks have outperformed all other investment instruments in the long term. Especially long-term investors are advised to keep a share portfolio in their investment portfolio to hedge against inflation.

Selecting Good Stocks: Fundamental Analysis

As indicated above, you research the company and not the stock you are interested in. There are several guidelines to assist you when scrutinizing a company to determine whether it is worth investing in. The process is usually termed fundamental analysis. The most significant stock investor so far in history, Warren Buffett, uses only fundamental analysis to select stocks that meet his criteria.

We shall now discuss the criteria for selecting good stocks. Note that these criteria apply to all stores. They entail Fundamental Analysis and Technical Analysis. After this, we turn to penny stocks to explain their specific characteristics and information on finding them.

Four of the most essential requirements when studying a company are:

• Product: Is the company's product something new, or does it fill a gap in a particular niche? Is it a quality product? If not a new product, will it compete effectively with existing products?

• Profitability: Does the company make a profit, and has it made profits over three or more years? What do its debt levels look like?

• Resilience: How robust is the company? Does it have the potential to withstand inflation, higher interest rates, a rise in fuel prices etc.?

• Management: Is the company's management competent? Are they people with integrity, good reputations and diligence? Do they publish financial reports regularly and on time? Do they have open communication with their shareholders? The CEO (Chief Executive Officer) plays a vital role in the management of a company. Although this must be a consideration, it does not mean that a CEO with a magnificent record with one company will automatically achieve the same proficiency with another.


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