Penny Stocks for Beginners and 3 to Buy Now!

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Complete Penny Stocks for Beginners Guide and How to Double Your Money

Hey Bow Tie Nation, Joseph Hogue here with the Let’s Talk Money channel and a video I should have done a long time ago!

Nation, investing in penny stocks is one of the most popular and profitable themes here on the channel. Hundreds of thousands of you have tuned in to get the best penny stocks and it’s led to some amazing returns! Of the 17 penny stocks highlighted this year, we’re up 44% on average and a 123% annualized return.

Great investments like Fastly, now up 369% since March when it was a much smaller company or Elevate Credit recommended less than three months ago for a 53% return already!

But I haven’t done an all-in-one guide to penny stocks yet, a penny stocks for beginners video to help you understand these high-risk, high-return investments and set you up for success.

That’s what I want to do in this video, set you up with a penny stocks tutorial that will help you find your own stocks to buy. We’ll start with a basic explanation along with the pros and cons of investing in penny stocks.

I’ll show you how penny stocks can make you rich and then show you the difference between long-term investing and short-term trading and what you need to know for each. Finally, I’ll reveal three more penny stocks to watch whether you’re a beginner or just want those huge returns!

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What is a Penny Stock?

First of course, we need a definition of penny stocks and I think this is going to surprise a lot of you out there. After every penny stock video, I get comments on share prices of the stocks, like why am I talking penny stocks with stocks at five- and ten-dollars a share.

The reality is, there’s no set definition for penny stocks. The most commonly accepted is a company with a market cap, the total value of shares, under $1 billion…that’s it. Stock price really has nothing to do with it.

As an example; let’s compare two stocks. CyberOptics Corporation, ticker CYBE, is a $217 million company with just $61 million in annual sales…so a very small company, yet it’s shares trade for almost $30 each. Now $2.1 billion makeup giant Coty Inc, ticker COTY, with nearly $4.7 billion in annual sales but a stock price under $3 per share.

You certainly wouldn’t call $2.1 billion Coty a penny stock company. It doesn’t have the fast growth or flexibility we’re talking about when we talk about penny stocks. The fact that it’s share price is under $3 is the simple fact that it’s issued 763 million shares while CyberOptics has just 7.4 million shares issued.

So always keep that in mind when you’re looking for penny stocks, price means nothing. What you’re looking for are these small companies with faster sales and earnings growth, companies with the flexibility to beat larger competitors to the trends.

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Pros and Cons of Penny Stock Investing

Pros of investing in penny stocks are the opportunity to get in on the next big thing before it’s $2 trillion Apple or before the 4,000% return on shares of Netflix over the last decade.

Investors also like the excitement of investing in penny stocks and the fact that you’re supporting smaller companies as they grow.

It’s not all rainbows and unicorns though, there are some downsides to penny stocks as well. First is the volatility in these and reverse of those big returns. Even on those solid returns over the last year, seven of those 17 penny stocks are in the red as much as eighteen and 23%.

The market for these small companies, especially the ones trading on the pink sheets, is also rife with fraud and scammers. These companies may not have the same reporting or regulatory requirements compared to larger companies. There’s typically less information publicly available and fewer analysts cover the shares so there isn’t that depth of analysis for investors.

This was the bulk of my job as a venture capital analyst and for private wealth. Finding these small pre-IPO companies or new penny stocks and digging into the financial statements to separate out the best and make recommendations.

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Can Penny Stocks Make You Rich?

But that extra work pays off. The average annual return on venture capital and angel portfolios is around 27%, nearly three-times the market average, and even small cap stocks in general tend to beat the market with the Vanguard Small-Cap Growth fund beating the S&P 500 by over 43% over the last decade.

And penny stocks can make you rich. That outperformance on the small cap fund would turn $200 a month into $187,000 over 20 years, eighty-grand more than investing in the broader stock market…but investing in penny stocks, the smallest of the small-cap companies, could grow the portfolio to over a million dollars in the same amount of time!

Penny Stock Trading vs Investing

But to do this, you have to understand the difference between penny stock trading and investing in these companies. Either can make you rich but confusing the two will leave you in the poorhouse.

Trading penny stocks means taking advantage of short-term trends and taking your profits within a few months at most. Here you’re buying into the stocks on potential for a news release, on technical signals or just on that short-term valuation.

Investing in penny stocks is much more about that long-term view of getting in on good companies before they become industry leaders. Here you’re looking for a competitive advantage in a product and a large market for sales growth.

So in that short-term penny stock trading, you’re looking for a quick return and not necessarily a company you think can change their industry. Here you’re watching for stock prices that break above their 50-day moving average, move into oversold conditions with valuations below their own historical averages and ones that might be benefiting from recent news or trends.

In that longer-term investing strategy, you’re looking for a company with an innovative product that is changing its industry. The company is growing sales at 20% or more a year for consecutive years and has a long runway in a large market. You’re looking for companies that are not only growing sales but are improving on costs, so making more money and becoming more profitable, to build towards those positive earnings.

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How to Invest in Penny Stocks

And this type of long-term investing in penny stock companies is where I like to play. It’s where I spent my time as a venture capital analyst and it’s actually less work than that trading strategy.

With penny stock trading, you have to constantly be watching your charts and finding new targets, jumping in and out of stocks. With that longer-term view, you’re just investing in a handful of really great companies, holding on and riding two or three to those five- and 10-x returns.

With this, I want to highlight three stocks I’ve been watching but I wanted to share the penny stock screener you can use to start your search. I’ll usually start with a screener like this one to narrow my stock list down to 10 or 20 stocks to research further.

To start, I’ll usually use a simple screen in the Webull app to narrow my list of penny stocks. I can click through to Markets in the menu, then access the stock screener and you can save screens here for easy access in the future.

The first thing I do is narrow the market cap, that’s the company’s market value of shares, to less than $100 million which gives us the very smallest companies. Technically, small cap stocks can go all the way up to $1 billion in market cap but anything over a few hundred million is going to have a lot of analyst attention already.

I’ll then go into Volume here, and this is the average number of shares traded on a daily basis, so a great measure of market interest in the stock. We’re trying to find companies that the market isn’t wild over just yet so we’ll narrow this to less than 100,000 shares traded.

I’ll also use this ROA screen, that’s return on assets, for one last factor on company performance. Here I’m not trying to kick out too many companies but I do want to focus on those with a positive return on assets.

As you’re using the screener, you can see it updates below with the number of stocks that meet the criteria. You can also use some of these technical indicators or some of the other fundamentals, just to narrow the list a little so you don’t have as much research to do.

Besides the stock screener, I really like the Webull app for its other features like the stock simulator that gives you a million dollars to test out your ideas in paper trading. I’ll leave a link in the video description below, check it out and you’ll get a free share of stock worth up to $1,600 when you make your first deposit.

3 Penny Stocks to Watch

First here is $125 million Zovio, ticker ZVO, trading around $3.90 a share and this is one we first recommended in May at $2.16 per share. It shot up to over $7 for a 224% return but has come back down and could be another great opportunity to get back in.

Zovio is a leader in the education tech space and I was surprised in May, looking at this company that it hadn’t blown up already. Zovio partners with colleges and universities to deliver online and connected solutions to the traditional way of education. We’re talking online testing, faculty management, software that is going to be in high demand over the next year.

So with the importance of all this during the lockdown, it wasn’t a surprise when the shares surged to over $7 a share in on the second quarter earnings call in August. The company reported $7.7 million in operating income for the quarter, a $12 million increase from the operating loss of $4.8 million last year. The company also swung to a net profit per share of $0.24 per share, more than double the $0.11 per share analysts had been expecting.

Shares have come down since the peak but this is still a strong long-term play. Traditional schooling has started to come back but a lot of schools are either on a mixed approach or having to shut back down as infections break out.

On top of that strong income growth, this one has a pristine balance sheet with over $76 million in cash reserves against just $10 million in debt. Even on the higher $125 million market cap, we’re still talking half of this stock’s value is in cash!

The sole analyst covering the shares here, Alex Paris over at Barrington, has a target price of $10 per share and I definitely think it can get there.

This next penny stock, GateKeeper Systems, ticker GKPRF, is the smallest of the group, one we highlighted recently in a stocks under $1 video.

Gatekeeper is a $55 million provider of tech hardware and video solutions in the public and private market. I really like this market and in fact, the company has a hand in some of the best trends I’m watching.

Besides providing the video capabilities for smart cities and security, its system is AI-driven and combines video analytics to make better decisions. Its platform as a service model will also mean consistently growing revenue as cities adapt to the IoT revolution.

Sales have grown at an 11% annual pace over the last three years but have booked growth of 26% this year, so some momentum there in the top-line. It’s also cash positive with $1.75 million in cash against just $240,000 in total debt with all the cash availability it needs.

A short-term catalyst for the stock is in its Intelligent Temperature Sensor System, an automatic detection system that scans the public for body heat that could signal COVID19 infections. This thing has a huge market even after the current pandemic and could boost sales further.

This one’s a little larger at $596 million market cap but still in that penny stock size, Magic Software, ticker MGIC, and this one actually pays a 2% dividend yield.

Now that’s not a huge dividend but it’s extremely rare for these small, faster-growing companies to pay any dividend at all, so it’s nice to get something while you wait. The company is a global player in software development including app development and IT infrastructure design. It helped over 3,000 clients in North America and Europe and has a great revenue outlook.

The software application industry is expected to grow by 16% annually through 2022, and the company is banking on that for its own growth. Sales grew by 14.5% last year and 12.3% in the last quarter to over $348 million on a twelve-month basis.

For that cash availability metric, short-term assets are three-times the short-term liabilities and the company has $79 million in balance sheet cash against just $39 million in debt, so an excellent cash position.

Three analysts with price targets here and every one of them is above the current share price, from a low of $15 per share to as high as $17 each over the next year.

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Penny stocks are high-risk and high-return investments. You can potentially double your money very quickly but can also lose a lot if you're not careful. Make sure you know how to pick penny stocks and how to find those great long-term stocks.

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