First of all it is important to define exactly what is considered a penny stock. A penny stock is not just stocks that sell for one or two cents a share but include a range of securities from one cent all the way up to five dollars a share. The reason for using securities instead of stocks here is because there are other financial products that fall into the five dollar and less category. And all penny securities can produce great wealth if the investor stays well informed and are some of the best stocks to buy.
In looking at penny stocks or securities, it is best to rely on professional feedback and any news articles that can be found regarding the company an investor is interested in. One example is “…DHT MARITIME INC., formerly Double Hull Tankers, Inc…” (Ticker symbol DHT NYSE) DHT’s ranking of “Hold” by Sabrient Investment Research and The Street. This may sound boring, but on 19 Oct 2011 DHT closed at $1.81 a share with an annual dividend of $0.40 per share, which is paid quarterly at $0.10 per share. This is the exciting part, divide the $0.40 into the share price, it’s a 22% return. Be careful though, because sometimes a good deal could go sour very quickly. This is why it is also important to keep track of the news involving the investment. Of course, in DHT’s case the only news feeds lately is their financial statement announcements, but the bad news is, if you visit their web site, they lowered dividends as their share price shrank. This is a warning sign that the company has poor financial backing and is cash poor, and since it is a shipping company it has been effected by the global economy. Another security that may be worth looking at is Chimera Investment Corporation (Ticker symbol CIM NYSE), a real estate investment trust (REIT) that invests in residential mortgage loans, residential mortgage-backed securities, and real estate-related securities. On 19 October 2011 the share price closed at $2.93 with an annual dividend of $0.52 for a return of 17.75%. REITs have become popular because federal law requires them to show they pay high rates of returns and they are vested in more than one security similar to a mutual fund. Also CIM is rated as “Hold” by Sabrient Investment Research and The Street and no negative press. But again the signs of danger exist in reduced dividends over time.
In conclusion, there is a lot of money to be made if you are willing to take the risk. But be sure to keep a close eye on the penny securities you choose because they can sell off and go bankrupt overnight.