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We have been involved in reporting critical news updates on penny stocks for years and have chosen to compile this list in effort to help investors avoid many of the mistakes that are made daily when investing into these cheap stocks.
This list of tips reveals important techniques and investment secrets that have allowed us to provide our Platinum Members with numerous penny stock picks that have gained well over 100% to 1000% after release.
Most penny stocks DO NOT provide access to their financial information and rely entirely on hype and overstated news updates to pull in new investors, while simultaneously hiding the key information that would allow you to properly decipher the true underlying value of the company.
When it comes to large companies that trade on major exchanges we can easily learn the financial standing of those companies and therefore, their value as an investment because each quarter they release publicly accessible reports stating the money they have made, their profit after expenses, the cash they continue to have on hand, and the amount of debt that they owe. This public access to financial information makes trading these larger companies easier but this same information access is often not made available by most companies that trade as penny stocks.
A common idea spread throughout other guides that provide tips on trading penny stocks, is that you should invest in penny stocks that have little or no debt and are profitable, which is great information in theory but in actual practice the vast majority of these trading guides neglect to mention that most companies trading as penny stocks do not provide access to the information that would allow you to make such determinations.
Penny stocks are not required to file their internal financial information and even if they do, that information is not required to be audited by a third party firm that can verify the information as being truthful, and then even worse, whether that information is audited or not, they are still not required to file that information with the Securities and Exchange Commission (SEC).
With all of that said the most ideal penny stock picks are those that regularly file quarterly and annual reports that can essentially show you the companies balance sheet, and only when these reports are also audited by a third party firm to validate the truthfulness in their reporting, and that information is also filed with the SEC rather than through the “alternative reporting standard.” If a penny stock pick adheres to all of this and manages to show impressive revenue growth and profit margins, they are a true diamond in the rough and less likely to be hiding damaging information.
The best way to know the level of transparency that a company provides in its financial reporting is through OTC Markets. On that site you can individually search any stock by its ticker symbol and view that information and more. More on that can be found under our own write-up on our OTC Market trading tiers report.
Naturally, this concept sounds obvious at first glance but as explained above, the vast majority of companies that trade as penny stocks do not publicly disclose their internal financial information.
When you do come across a company that publicly files financial documents that are fully vetted by an outside firm, and also are filed directly with the SEC you should review the companies quarterly and annual reports to gain an understanding of the value and future growth prospects of the company. This information can provide you with key information on the revenue and profit margins of a company. The most ideal setup that you would want to see, is a pattern of steady quarter over quarter revenue growth as well as steadily increasing net profit for each of those quarters. Increasing revenue is great but if profits aren't also rising in kind, there may be something wrong.
Toxic debt by way of convertible promissory notes tends to be the kiss of death that takes down many penny stocks . Many of these small companies fall for the allure of 'easy' money borrowing cash from lenders in exchange for convertible promissory notes that can be converted into shares of the companies stock at a later time at a greater multiple than the initial borrowing value. This allows for a short term fix to a need for cash that can lead to an avalanche of selling by that lender at a later time once they are able to convert those notes into shares.
One of the most important tips when looking into buying any penny stock is to open any quarterly or annual report and then run a simple 'CTRL + F' search for “convertible note” or “promissory note.” Filings can tend to be very lengthy, so that simple trick will easily allow you to quickly and easily discover any toxic debt that may be on the companies books. Then you can simply click the up or down arrow in the search to check for other examples of those terms within the report. If those searches do not show any toxic notes and it is a company that fully discloses financial information, this means that the company likely does not have that sort of debt on the books and therefore, may hold greater odds of being a stronger investment option than other OTC stocks that may have such debt on their balance sheet.
One of the most common things we hear people say when they are interested in getting involved in investing but have little or no prior experience is that “I don't understand stocks.” Unsurprisingly, the easiest way to get to know and understand something that you do not understand is to be willing and able to read about it. A common saying within the investment community is “Do your DD.” “DD” is an acronym that stands for Due Diligence and the full saying is one meaning that rather than rely on others to feed you information, you should set out to obtain information on your own so that you know what to look out for.
Learning how to properly locate various forms of information on a company will allow you not only to better understand a specific company and its stock but also equip you with the tools that you will need to more quickly and easily research other companies in the future. Penny stock picks tend to have a bit less publicly available information about themselves than larger companies do, so it is always in your best interest to be properly equipped with the tools to locate information on them, prior to trading them.
The more you read about a specific company, the more greatly you will understand how it works and what it does. To do this you can read through that companies website, prior news releases, and reputable sources of information pertaining to them. When it comes to penny stock trading a notable tip would again be to refer to the wealth of information that can be found on the OTC Markets site because it provides information on prior news releases, summary of the companies business with links to their related online channels, their standing as to whether the company fully reports audited financial information with the SEC, and the companies filed earnings reports.
Trading penny stocks that trade on the Over The Counter Bulletin Board (OTCBB or OTC) or Pink Sheets Open Market is commonly viewed as being higher risk than trading companies on larger markets like the NASDAQ, NYSE, and AMEX largely due to the fact that there is far less trading volume but another massive factor is the fact that there is no requirement for PINK Sheet traded stocks to publicly disclose filing information. OTC Market stocks on the other hand, do have to provide some level of disclosure. This means that regardless of how dismal a companies financial situation may be if they trade on the Pink Sheet Open Market structure, they are not required to disclose any proofs of their poor financial standing, allowing management at these companies to leave investors entirely in the dark about their dealings and that is clearly a major negative of the market. You could essentially find yourself investing into a company that is billions of dollars in debt with $0 in the bank and no hope for establishing a revenue stream and be none the wiser to the situation at hand as you buy shares because they are not required to tel you.
The good thing though, is that the Pink Sheet and OTC Market operate on tiered systems that inform you of the level of disclosure that each company provides and knowing how to sort through that information can prove a monumental aid in mitigating the risks of investment.
These are the various trading tiers of the Pink Sheet and OTC Market that can tell you whether a company is hiding critical financial information from the public, or are fully transparent in making important information about their finances easily accessible. When you search companies one at a time on the OTC Market website each listing will provide a the information on which of these tiers the company resides within:
Pink Sheet Open Market Tiers:
STOP SIGN/No Information Tier: These are companies that are either unable to disclose financial information or do not disclose information specifically to keep investors in the dark. These are the most risky penny stocks to invest in because while they may have exciting press releases to build hype, they do not disclose any information that can verify those claims and do not file financial disclosure at all.
Yield Sign/ Some Information Tier: These are companies that have made some degree of financial disclosure available within the past 6 months. This tier is otherwise for companies that may be in financial distress, or in the midst of bankruptcy but have still made limited information available on either the OTC Markets website or on the SEC's EDGAR system, or if the company is indeed in bankruptcy, through publicly information filed with a United States Bankruptcy Court.
PINK Current Information Tier: This is the highest level of the PINK Sheets Open Market platform because it is designed for company's that are not yet elevated to the OTC Market tier, or those above it, that are still making key information publicly available. As per OTC Markets to qualify for this tier companies on the PINK Sheets must submit the following documentation:
-Financial Statements: Two most recent Annual reports and any subsequent Quarterly Report.
-Disclosure Statement: Most recent Annual and any subsequent Quarterly Reports.
-Attorney Letter covering all relevant information for non-audited companies.
OTC Market Tiers:
OTCQB: The OTCQB Venture Market is the first tier of the OTC Market structure and is the first step above the Pink Sheets Current Information Tier. Companies that trade on the OTCQB report current information and undergo an annual verification and management certification process. Companies trading on this tier are viewed as more reliable than those on the Pink Sheets due to greater transparency in their willingness to provide key information to investors, including a requirement for U.S. Companies to have audited annual financials by a PCAOB auditor.
OTCQX: The “OTCQX Best Market” tier is the most highly established and transparent tier of the OTC Market. This tier is seen as a final step for companies before listing to major boards like the NYSE, NASDAQ, or AMEX.
As stated on the OTC Markets website, to qualify for the OTCQX market, companies must meet high financial standards, follow best practice corporate governance, demonstrate compliance with U.S. securities laws, be current in their disclosure, and have a professional third-party sponsor introduction.
With all of the above stated relating to tiers the higher the tier the lower the risk due to having a heightened degree of disclosure as you move from no information on the Pink Sheet Market, up to the Pink Current Information tier, beyond that onto the OTCQB tier of the OTC Market and then finally up to the highest OTCQX tier, prior to listing to larger exchanges beyond the OTC.
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