Personal Business and Finance

Traditionally, financial gurus would advise setting a mid-long term horizon for any investment. That focus is more changing as more and more people become financially savvy and educated on the potentials of great returns on investment when dealing with shares on the stocks market.

Trading in blue-chip stocks generally require large sums of money to be invested in order to see significant gains. These are usually low-risk and are truly a long term investment as you would see higher returns as the market curve makes a whole upward shift. As a guide, this usually takes several years to achieve and blue-chip stocks are a good investment vehicle to park your money into.

But what if you don’t have a large sum of money to invest? That’s where the marvel of trading in penny stocks come into play. By investing as little as $500 to a $1000 in these low-priced shares, you could potentially earn returns of more than double your initial investment in a matter of days.

Of course, investing in penny stocks carries with it a significant amount of risk that should not be overshadowed by its high-yield potential. As a general guideline, here are some criteria you would use to determine if the stock you are buying into is worth your risk.

1) A basic skill required in trading, calculate the Price-Earnings ratio of the penny stocks you are considering. This is easily done by dividing the stock price with the earnings per share. Then compare them with each other. The highest ratios are generally a good guide into which are the higher performing shares to buy into.

2) Next, calculate the Price/Earnings/Growth ratio, which is actually the Price-Earnings ratio you had obtained earlier divided by the projected growth of the company in the next 3-5 years. Choose those with the lowest ratios to set aside for consideration.

3) Have a look at the companies latest audited financial statements. This is crucial. Don’t just look at the companies net profits. These can be deceiving. Focus instead on whether or not the company has good cash flow. The company you choose has to be able to weather any hiccups that come along. Unforeseen circumstances should be factored in.

4) Do some background work on the people running and managing the company. Do not make the mistake of relying wholly on numbers, figures and statistics. Having good knowledge about the people who run the company’s operations on a day to day basis will stand you in good stead in the future.

5) Look at the state of the economy and the state of the company you are buying into. This knowledge may take some time to grasp but once you understand the mechanics of it, keeping updated would prove a breeze and an essential part in enabling you to make the best investment choices.

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