Hot Penny Stocks

So where do I start in finding a hot penny stock?

-To find the stocks that are likely to move, many traders run what is called a 'scan'. A scan is basically a filtered search of all stocks. One can set filters to find stocks with abnormally high volume, price movement, or any combination of a multitude of other indicators that can identify hot penny stocks. When they get a list of results, then it is time to check out the stock's 'chart'.

What is a 'chart'?

-A stock chart is a graphical representation of that stock's trade data, collected every minute of every day. A very basic chart will show the price of the stock on the Y-axis vs. time on the X-axis. Along with this there may be an 'indicator' or two. An indicator takes the input data and outputs a result based on a specific mathematical operation. Indicators allow chart readers to gain further insight into the trading that is occurring. There are tons of different indicators, but even a basic understanding of the popular ones will be a big help.

To learn more about charts, check out our Strategy Page on Technical Analysis. By knowing the basics of charting, or 'technical analysis', you will be able to narrow down your scan by another factor. Then you can focus on the 'fundamentals' of the stock, to find undervalued stocks.

The Zanger Report, published by the renowned Technical Analyst Dan Zanger, is our number one choice for technical stock picks. Dan publishes the newsletter nightly, revealing stocks with the hottest charts on the market. This lets you buy in before they make the move. With the Zanger Report you can invest in larger stocks and realize "penny stock" sized gains, with less risk. The Zanger Report could be your answer to build a diverse, secure portfolio along with the penny stocks you play.

What are 'fundamentals'?

-Fundamentals can include a company's financial reports, as well as non-financial information such as growth estimates of the demand for sold products and competing products. Investors will also look into new regulations or demographic changes, and economy-wide changes. To learn more about finding and evaluating financial statements, please read this article. Once you have filtered down to the stocks with the best fundamental and technical analysis, you will want to do one last investigation to determine the 'share structure'.

What is 'share structure'?

-Share Structure is a breakdown of the amount of, and types of stock the company has issued. The number of 'outstanding shares' (O/S) as well as the number of available shares on the market, the 'float', have the biggest effect on how a stock will trade. As a basic example, let us consider the effect of the float size. If there are tons of shares available on the market, ordinary sellers and 'market makers' will be able to sell these while the price moves slowly and in small increments. If the float is low, or near nothing, they will be forced to raise the price quickly - if buying pressure is greater than selling pressure - in order to entice other shareholders to sell. So, the ideal stock is one with a relatively low number of outstanding shares, and a relatively low float.

There is a negative side of having too small of a float, though. Without many shares "floating" around, it may be difficult to purchase shares without 'chasing' the ask. The more money you are trying to put in, the harder it will be. On the other side, it will often be difficult to sell your shares once you have them, unless there are enough buyers, a big enough buyer to sell all of your shares to, or you are willing to sell your shares for a substantial discount from the current price. Because of this, low float stocks can be very volatile, moving huge percentages in a matter of minutes, or even seconds. These can be far too dangerous for beginners, and should be traded only after some solid trading experience.

To start off, you will want to trade a stock with a medium number of outstanding shares, and medium float. For penny stocks this generally equates to an O/S count of around 100-500 million, and a float ~20% of the O/S. This is going to vary depending on the price of the stock. Stocks with a higher Price Per Share (PPS) can be just as easy to trade having a lower O/S and vice-versa.

In addition to the O/S and float, there is also the 'authorized share' amount, or A/S. This is the currently authorized maximum amount of shares that can exist in the market. This number reveals a very important thing; the number of shares that can be sold into the market by the company, AKA dilution. For this reason, traders will often be reluctant to load up shares if the O/S is much lower than the A/S. The reason being is the less shares the company has left to sell, the lower the chance of destructive dilution. Be aware, however, that a pink sheet or OTC company can increase their A/S on short notice. If the company's transfer agent, or TA is "gagged", you will have no way of knowing changes to the A/S, O/S, or float.

What is a Transfer Agent, and what is a "Gagged" TA?

What's Next?

Now that you can narrow down to a few stocks to choose from, which one should you go with, you ask? Well, where is everyone else going?... Check out the next page to see the best penny stock forums and message boards.