Ultimate Guide on How to Find Penny Stocks before They Explode

Trading concepts

How to Find Penny Stocks

“How to find penny stocks before they explode” is a very interesting question. You might also want to know as penny stocks are enticing especially if you aspire to make huge sums of money without investing too much capital. However, playing with penny stocks is extremely risky and better suits traders with higher risk tolerance. 

However, the good news is that it isn’t a big secret how to find penny stocks before a breakout. Contrarily, it is fairly easy but you have to put in some effort, time, and money. In fact, we are here to guide you on how to find penny stocks with loads of potential. Our today’s ultimate guide on how to find penny stocks before they explode contains all the information you need to know. Let’s dive in!

What are penny stocks?

Penny stocks are stocks of companies trading for a share price below $5. They are also known as micro-cap stocks. Some of such stocks may cost you only pennies. That’s why such stocks are known as penny stocks. 

Now the question is why penny stocks are so risky given the fact that they are so cheap? The reason is they are traded in over-the-counter transactions. You might find them on regular stock exchanges but that is very rare. That means penny stocks are difficult to sell as they are stocks of infamous small companies. Moreover, penny stocks are also risky because investing in such stocks is all about speculation and presumptions. Having said that, you invest in penny stocks with the hope that one day their price will rise and they’ll be traded on a regular stock exchange. These are the reasons why penny stocks are risky. So, why do people so eagerly invest in penny stocks? 

People eagerly invest in penny stocks despite the involvement of high risks and speculation because of high returns. They have the potential to return huge sums of money against small investments. Additionally, you also have a wide range of options in terms of penny stocks. You can choose companies with high potential but low stock prices because of being overlooked by investors. Eventually, stocks of such companies could one day explode and give you high returns. 

Where can you find penny stocks for trading? 

As you know, penny stocks are valued at a price below the $5 threshold. It means you will have to look for a trading platform other than traditional stock exchanges. The reason is that stock exchanges enlist stocks that have a price of at least $1. So, you can find penny stocks below $1 through OTC markets and on the over-the-counter bulletin board (OTCBB). However, it may well be possible that you can find penny stocks on some major stock exchanges as well.

How to find penny stocks before they explode? 

Although penny stocks have the potential to bring more profit than traditional stocks, it isn’t easy to find the best of them. Unfortunately, there is no short nor any easier way to find penny stocks before a breakout. If you want to know how to find penny stocks before they explode, you need to be fully prepared. Because you have to be an expert on the basics of stock analysis. There are numerous methods that experienced traders use to find the best penny stocks for investment. 

Fundamental analysis

Fundamental analysis is one of the two most basic as well as important strategies to determine the potential of penny stocks. In fact, it is absolutely imperative to know about key financial data, economic and political scenarios, and market standings of a company. For example, the critical data about the revenue and earnings of a company tell you a lot about the growth potential of that company. 

The most important indicator in fundamental analysis is the price/earnings ratio (P/E ratio). You can calculate it by dividing the price per share by the earnings per share of a company. If the ratio is higher, the company unquestionably has higher growth potential. Contrarily, if the P/E ratio is low, you can determine that the growth potential is also low.

Moreover, it is also crucial in fundamental analysis that you compare indicators of different companies belonging to the same industry. Comparing financial data of companies from different industries isn’t a good practice at all. Additionally, how to find penny stocks before they explode also requires you to know about the management team of a company. A team consisting of highly qualified and experienced professionals maximizes the odds of success of a company. Moreover, you can also look at other factors such as the company’s competitors and what does make this company different from others. In short, all the financial data and other key factors combine to paint a crystal clear picture of a particular company. 

Technical analysis

Technical analysis is another great strategy if you want to know how to find penny stocks before they explode. It involves examining and analyzing stocks prices as well as trading volumes. The results clearly indicate how a particular company is performing as compared to its competitors. For example, technical analysis of a company operating in the real estate industry will tell you how is it performing in this industry. Moreover, experienced investors and traders also look at factors such as economic as well as market conditions. 

Furthermore, there are two main techniques to conduct technical analysis. The first one is top-down and the second one is bottom-up. Typically, it depends on your trading style and strategy whether you prefer the first approach or second. For example, if you are a short-term trader, the top-down approach is for you. Conversely, long-term traders and investors usually take a bottom-up approach. 

Moreover, technical analysis is more fruitful for you if you follow a particular strategy. For example, you need to choose a strategy and develop a trading system. Additionally, find the best brokerage service and track your trades. 

Graham Number Technique

The answer to the question “how to find penny stocks before they explode” will be incomplete without the Graham Number Technique. It is one of the best techniques to find under-priced penny stocks. Benjamin Graham invented this technique. It enables traders and investors to find stocks currently trading at a very low or basic price. Graham Number Technique involves focusing on the Net Current Asset Value index. Subsequently, it requires investors to invest in companies that are at two-thirds of this calculation. 

To calculate Net Current Asset Value, you need to consider all assets and all liabilities of a company. Firstly, subtract net liabilities from net assets. Secondly, divide the answer by outstanding shares. Additionally, Graham also insists that investors should also look at financial data such as the balance sheet, profit and loss statement, and the cash flow statement of a company. Thus, the Graham Number Technique will lead you to find penny stocks currently valued at very low prices. Having said that, it gives you the opportunity to find penny stocks that will explode in no time.

Penny stock brokers

While knowing how to find penny stocks before they explode, you will quickly understand the importance of a reliable broker. You need a reliable broker to trade penny stocks. How can you find the best penny stockbroker? Consider the following key points.

  1. Firstly, it is crucial to know about the broker’s penny stock trading platform. You need a robust, reliable, and feature-rich trading platform. 
  2. Secondly, you need to look for the necessary research tools. It gets more crucial when you don’t know how to conduct technical analysis. Why is it so important? Because it is very difficult to find reliable information about OTC and small companies. Therefore, you need efficient and effective technical analysis tools to find the best penny stocks.
  3. Thirdly, it is also important that you choose a highly regulated penny stocks broker. Regulated brokers are safe and reliable. Otherwise, you may find yourself at the heart of a very dangerous situation. 
  4. Fourthly, choosing a less expensive broker is also important. In fact, you may find brokers that charge $0 commission on penny stocks trading. Therefore, choose a broker that is less expensive. However, it is also important not to compromise on other features that you need. Additionally, you should also look at the overall fee structure. Some brokers charge less trading commissions but have higher non-trading fees. 

Penny stocks screeners

Penny stocks screeners are very important tools to find the best penny stocks. These are specialized software or tools that a broker provides. Such tools require you to set some parameters and find penny stocks for you based on these parameters. For example, stock screeners may narrow down a list of thousands of penny stocks to just a few hundred, even a few. Having said that, it is important to have access to these tools. Therefore, you need to choose a broker that offers an efficient stock screener.

How to mitigate risks involved in penny stocks? 

Besides knowing how to find penny stocks before they explode, it is also important to know how to mitigate risks involved in penny stocks. You have to be fully prepared for this. The following are the tips that will help you greatly in this;

  1. You should consider penny stock recommendations skeptically. If you receive such recommendations, always do your research. Such recommendations are usually provided by paid promoters or insiders. Their aims are to gain from your investments. 
  2. Conduct technical and fundamental analysis before investing in penny stocks. Although sometimes it is difficult to gather all the required information, it is better to get as much as possible. 
  3. You also need to look for the platform where particular penny stocks are being traded. As we know that penny stocks are typically traded on over-the-counter bulletin boards, the risk involved is generally high.
  4. Additionally, you should also verify the claims of penny stock recommendations. Acting blindly means letting yourself fall into traps.
  5. Lastly, you should never be a ready-made believer. Rather you need to be skeptical. That means, conducting your research and doing some digging is always the key. Otherwise, you may find yourself entangled in fraud or pump and dump schemes. 

How to find penny stocks before they explode – the wrap-up 

Penny stocks offer the highest potential to turn small investments into huge sums of money. However, it is also a fact that they also carry huge risks. Therefore, penny stocks are best for traders and investors having high-risk tolerance. The good news, however, is that you can avoid huge losses if you understand how to find penny stocks before they explode. The procedure is long as well as complicated but offers numerous advantages. When you invest in penny stocks after conducting thorough analysis and research, the odds of making money substantially increase. 

The best strategies to find penny stocks before they breakout are fundamental and technical analyses. They enable you to find penny stocks with higher growth potential. Additionally, you can also use Graham Number Technique to find undervalued stocks. Moreover, it is also important to look at other factors such as overall economic conditions. Additionally, you also need to pick a reliable penny stocks broker. The broker should offer a robust trading platform and necessary trading tools. In short, if you are really up to knowing how to find penny stocks before they explode, you have to learn all these things. That’s because it is the only way. There is no shortcut and other ways may lead you to a catastrophic end.

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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