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Traditional Ways of Analyzing Stocks
You have probably heard the more common kinds of stock analysis: the fundamental analysis and technical analysis. Briefly, fundamental analysis uses a corporation's financial statements such as debts and revenues, price and earnings per share as well as debt and equity, to determine if a stock would be a good investment or not. Fundamental analysis is a good start in ranking penny stocks but because oftentimes, small cap corporations have no or limited available information, it is difficult for an analyst to accurately examine a penny stock. Technical analysis, on the other hand, uses patterns of price changes and price charts in determining a stock's investment value. But since we know that penny stocks often are prone to price fluctuations that are not dependent on rational factors but on insignificant determinants, the conventional technical analysis cannot work on penny stocks.
Other ways to determine stock values that have sprung forth from fundamental analysis is analysis of only one of the fundamental parts of a corporation's financial situation such as price per earnings ratio or P/E ratio. Some analysts think that corporations with a low P/E ratio would have undervalued stocks whereas companies that have higher P/E ratio would have overvalued stocks. The problem with this analysis is that it disregards other important financial factors where corporations significantly differ. That is why the analysis that compares P/E ratios supposes that all other values are equal.
Another kind of analysis that has been used by investors is by looking at the buying and selling patterns of insiders of the corporation. They think that if the corporation's own officers or employees start selling their own shares of stock then this means that they know some information that the corporation is going down. Similarly, if the corporation's insiders are buying more shares of stock then this means that the corporation is doing well. This kind of analysis is also flawed as a corporation's officers may have their own personal reasons in buying or selling the stocks.
Others rely on other kinds of approaches in buying stocks. These are called themes that include buying undervalued stocks, rolling stocks, hanging on to a momentum investment, bottom-fishing, and buy low-sell high concepts, among others. They are unlikely to work but if they do, they cannot be sustained. It is more like throwing a stone blind and hoping you hit the target.
There are other so-called gimmicks out there that promise to yield high profits and good results, but one should know that oftentimes they are unreliable and ineffective in choosing the right kinds of stocks at the right time. It is important to remember that though fundamental analysis or technical analysis, or may be even some of the other kinds of analysis, work on conventional stocks, these kinds of analysis are not suited to penny stocks. Penny stocks are different from other stocks and they operate with different rules. Therefore, penny stocks should have their own brand of analysis, separate and distinct from the more traditional ways of analyzing stocks.
Other ways to determine stock values that have sprung forth from fundamental analysis is analysis of only one of the fundamental parts of a corporation's financial situation such as price per earnings ratio or P/E ratio. Some analysts think that corporations with a low P/E ratio would have undervalued stocks whereas companies that have higher P/E ratio would have overvalued stocks. The problem with this analysis is that it disregards other important financial factors where corporations significantly differ. That is why the analysis that compares P/E ratios supposes that all other values are equal.
Another kind of analysis that has been used by investors is by looking at the buying and selling patterns of insiders of the corporation. They think that if the corporation's own officers or employees start selling their own shares of stock then this means that they know some information that the corporation is going down. Similarly, if the corporation's insiders are buying more shares of stock then this means that the corporation is doing well. This kind of analysis is also flawed as a corporation's officers may have their own personal reasons in buying or selling the stocks.
Others rely on other kinds of approaches in buying stocks. These are called themes that include buying undervalued stocks, rolling stocks, hanging on to a momentum investment, bottom-fishing, and buy low-sell high concepts, among others. They are unlikely to work but if they do, they cannot be sustained. It is more like throwing a stone blind and hoping you hit the target.
There are other so-called gimmicks out there that promise to yield high profits and good results, but one should know that oftentimes they are unreliable and ineffective in choosing the right kinds of stocks at the right time. It is important to remember that though fundamental analysis or technical analysis, or may be even some of the other kinds of analysis, work on conventional stocks, these kinds of analysis are not suited to penny stocks. Penny stocks are different from other stocks and they operate with different rules. Therefore, penny stocks should have their own brand of analysis, separate and distinct from the more traditional ways of analyzing stocks.
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