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Penny stock research can be an arduous task, but it can also be overwhelmingly rewarding if done well. The bottom line is that young companies are speculative in nature. Some may even be more akin to gambling. The key to success is a proper risk to reward ratio. It’s one thing to purchase bullion direct from a dealer, for you know what you’re getting. And this isn’t a mere bullion fund. These stocks take a bit more work.
Frankly, the only stocks I’ve ever invested in that can return heart-stopping gains, and thereby justify the risk, are resource explorations companies. Sometimes referred to as junior resource companies, these folks follow a trajectory of three primary milestones in their evolution. These three milestones are really where the rubber meets the road in the resource arena.
Penny Stock Research And The ABC’s Of A Start-Up
An exploration company is born as a mere start-up, milestone one, and ideally your penny stock research would catch a company at this phase. It is a micro-cap, generally on the Toronto Venture Exchange. They are light, tight, and ready for flight. With precision and acumen, they prepare to slice and dice the planet looking to unearth buried treasure. If you find a start-up with expert leadership and a track record, this can be a life-changing investment.
At the start-up phase, there are no assets and little cash. They do need to be able to raise cash though. They have but one mission, and that is to find something of worth. Therefore, the company trades for pennies. It sounds great, and easy, but there’s a reason they are known as “burning matches.” You don’t want the fire to go out on your investment. So, you’ll want to stack the deck.
Penny Stock Research Aided By Having Enough Rocks To Turn Over
Ideally, you want a start-up that has the rights to large chunks of ground or diverse parcels in different places of promise. Prep for exploration is the second milestone, and it’s a core aspect of your penny stock research. If the locale is politically stable, this is a major advantage. If the people are amenable to mining activities, this eclipses concerns about social unrest and violent opposition. A stacked deck paves the path for rolling out the exploration process. At this point, there could be a joint venture in place to help fund the efforts.
Preliminary exploration is much less intense, and less expensive, that drilling samples. Companies begin by doing soil and rock sampling or trenching. If water is on the property, stream sediment sampling is helpful. A myriad of scientific surveys are done, including magnetic, geochemical, geophysical, and other testing. They may spend time poring over satellite images. If the property has been explored previously, the company can investigate old records for clues.
Once basic first-step assessments are complete, any projects with reasonable promise can be further developed, and this brings us to the third and final milestone. At this point, the projects are shopped to larger companies that are more prone to deploy the capital necessary to develop further. This type of joint venture approach is a signal to resource investors, and something you scan for in your penny stock research. Nothing is certain at this point, but the vote of confidence a joint venture partner confers to a project makes it a better bet.
Penny Stock Research In Light Of The High Cost Of Raising Cash
While raising cash is important, it’s also important that it not take place with share dilution as the consequence. Tight market caps are critical, else proceeds will be spread over an inordinate number of shareholders. You absolutely need to understand that share price is not always a reliable guide. A more “expensive” stock, in absolute nominal terms, can actually be a better value where the outstanding shares are favorably limited. As a general rule of thumb for your penny stock research, note that finding a company with a market cap under $50,000,000 is ideal. Junior miners can even have market caps of 100 or 200 million or so. But, you want there to be ample room for the market cap to increase as the company matriculates through the mining cycle.
Penny Stock Research – Who’s Who In The Zoo With You?
Another key factor in your penny stock research is to examine the degree of insider share ownership. You absolutely want the company principles to hold a decent part of the company. If they don’t own at least a tenth of the company, I pause for closer examination. It’s not necessarily a deal killer, but I really would want to know why they don’t believe in their efforts enough to take a sizeable stake when it can be had for cheap. When you start to see a young company that is more like 15% self-owned, that’s a really good sign.
Running with that penny stock research theme, let’s take a look at just how you, too, can own a major stake in a young company if you want to. Frankly, I’ve personally bought 1,000,000 shares of a company in one sitting. I have to confess that it is an exhilarating feeling. Let’s say you find a promising company with 13% insider ownership and you know the management has a proven track record. If you get in early, let’s assume that there are just 30 million outstanding shares currently selling for $.05 each. Purchasing just 300,000 of those 30,000,000 gives you a full 1% stake in that company for just $15,000. I not suggesting it would be wise to put $15,000 in one junior exploration play. However, you can see how climbing aboard well-researched, solid potential stocks early in the game presents unique opportunities. And, depending on the size of your portfolio and degree of penny stock research, $15,000 in one company may just represent a reasonably balanced position size.
