Market Overview

5 Essential Rules For Penny Stock Investing

Some penny stocks are able to beat the odds and become massive, respectable corporations that reward investors with hefty returns.

But for every success story, there are dozens (perhaps hundreds) of penny stocks that don't go anywhere.

"The best way for people to make a lot of money on penny stocks is to quit trying to get rich off of whatever's in the media," Peter Leeds, publisher of Peter Leeds Penny Stocks, told Benzinga.

"When you see something in the media -- whether it's Bitcoin or marijuana stocks or binary options -- typically it's too late at that point."

Leeds is the author of Penny Stocks For Dummies and Invest in Penny Stocks: A Guide to Profitable Trading.

Click through the slideshow to see his five essential rules for penny stock investing.

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this slideshow.

Posted-In: Peter Leeds Peter Leeds Penny StocksNews Success Stories Trading Ideas Interview Best of Benzinga

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    Don't Trust Free Recommendations

    Don't Trust Free Recommendations

    "The thing with penny stocks is, rule number one: you never invest in a company you hear about for free," Leeds told Benzinga.

    "There's all sorts of people who are promoting these companies. They're getting benefits by misleading you about how good the company is."

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    Don't Think Pink

    Don't Think Pink

    Leeds said that investors should "avoid any companies that are trading on the Pink Sheets market over-the-counter."

    "Stay with the good stock markets, 'cause that's typically the better companies," he added. "We're talking OTC Bulletin Board, which is a subsidiary of Nasdaq, or Nasdaq itself.

    "There are a few companies trading in Canada on some of these exchanges that are a little bit more regulated."

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    Investigate The Company

    Investigate The Company

    Don't forget to look into the company's financials.

    "This is no different from investing in large companies except that these are more volatile," said Leeds.

    "If you like the company, make sure they have a strong management team, good finances (like increasing revenues, low debt, that sort of thing), so you're investing in actually a company, and then typically the stock will follow suit as the company grows."

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    Don't Be Afraid To Make A Call

    Don't Be Afraid To Make A Call

    It's important to read a company's financial reports, but your research shouldn't end there.

    "Call the company yourself," Leeds advised.

    "You'd be amazed by how much you can learn just by speaking to another human being, get an idea if they're a legitimate company, or if they're a scam or a sham.

    "When you talk to these people, you can ask 'em questions, ask 'em about the company, and they'll definitely help you out a lot."

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    Remember That Most Penny Stocks Are Bad Investments

    Remember That Most Penny Stocks Are Bad Investments

    Like it or not, most penny stocks are duds.

    "Ninety-five percent of penny stocks are actually bad companies, bad investments. In terms of finances it's a financial train wreck," said Leeds.

    "You want to be looking at a company that is a good investment -- a good, solvent company. And just remember that 95% of them are financial train wrecks. You've gotta be careful about that."

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