How to Research Penny Stocks

Penny stocks lack an organized market and are mostly traded outside exchanges, unlike large and medium cap stocks. Further, not much information is publicly available on related companies' financial performance and their management. Because of this information vacuum, penny stocks mostly languish in obscurity, without drawing much attention from investors. As a result, trading in penny stocks is also listless most of the time.

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However, these stocks sometimes turn out to be big money-spinners for their buyers after their growth potential is discovered by investors and prices start soaring high in line with their fundamentals. Since these stocks are fairly undervalued, price increases are very sharp after investors start lapping them up. Identifying growth potential of a penny stock before the markets wake up to it is not difficult, though it requires effort.

Anyone planning to invest in penny stocks can collate market intelligence on penny stocks by alternatively monitoring pink sheets and over-the-counter bulletin board (OTCBB) reports, which are published on a daily basis. It used to be that companies listed on the pink sheets and OTCBB were not required to disclose details on financial performance and other key aspects of their business. However, subsequent rules framed by the National Association of Stock Dealers (NASD) have necessitated disclosure of key performance for listing on the pink sheets and OTCBB. Now, penny stocks listed on the OTCBB have to report to the government as well.

There are some penny stocks of which, although traded on the OTCBB, details are not shared by the corresponding companies. Details on buy and purchase quotes of such shares can, nevertheless, be found from NASDAQ. This is because NASD rules require reporting quotes to NASDAQ.

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