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What are your chances of finding winning penny stocks?

by , 23 October 2015

Penny stocks can be extremely lucrative. You have the chance of picking up penny stocks trading for mere cents and sitting back while their share price rocket.

But, of course, not all penny stocks have this winning potential. There are many that will remain penny stocks and never shoot the lights out.

So what are your chances of making money from penny stocks?

Let's take a closer look…

How penny stocks behave

Penny stocks are the smallest shares on the stock market. They may be new companies or they may be older, more established firms that have fallen from grace.

In South Africa, the term penny stock describes a share that’s trading for less than R10.

Penny stocks don’t tend to behave like large companies. They can be much more volatile, which makes them more risky for you as an investor.

But unlike larger companies, penny stocks have the potential to make your huge returns over a shorter space of time. Larger companies tend to plod higher as they get bigger.

The returns of penny stocks also follow a ‘power law distribution,’ Sean Keyes in Penny Sleuth explains. The power law distribution simply means that only a small number of the penny stocks in your portfolio will make you the most money.

How to find the best penny stocks

If all goes well for a small company, it can really take off and grow rapidly. Penny stocks can grow exponentially in size, which isn’t possible for larger companies.

As venture capitalist Marc Andreessen explains, when it comes to promising small companies, only about 6% of investments which represent 4.5% of the dollars invested, generate about 60% of your overall returns.

Broadly speaking, the odds are against you with penny stocks. It comes down to your ability to find the really outstanding penny stocks to invest in. They will give you the best chance of making money.

So there you have it. What the chances are of your finding winning penny stocks.

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