We cannot overemphasize that the basics of penny stocks must be mastered first before an investor or a trader can hope to make a profit with these investments. Keep in mind that penny stocks are highly risky investments requiring careful consideration of many qualitative and quantitative factors. Failure to perform a thorough analysis and evaluation of available information can lead to steep losses where microcap shares are concerned.

But once the basics have been mastered, penny stocks can be one of the most profitable investments traders can find. The capital investment is minimal compared to the money necessary to dabble in blue-chip stocks but the profits more than make up for the costs. The trick is in finding the hot penny stocks and then investing in them at the right time.

What Are Hot Penny Stocks?

Before we can discuss how to find hot penny stocks, we must first define it. Simply put, these are shares issued by microcap companies that possess the highest level of profit potential in the near future. The term hot is used to denote their financial desirability as opposed to physical attractiveness in a human.

The criteria for hot penny stocks will understandably vary from one individual to the next. Generally speaking, the criteria will include the following:

• Quantitative factors related to the issuing company and to the stocks themselves. We are talking about high price-to-earnings price ratio; upward trend in revenues and net profits; and other measureable factors in terms of the company’s liquidity, stability and profitability.

• Qualitative factors that can affect company performance by itself and within the industry. We are looking for technological advances, political developments and social acceptance that may have favorable impact on the stock price.

As can be implied, it is essential that research must be performed to verify that the penny stocks meet the above quantitative and qualitative requirements. When the stocks do, then these can be considered hot penny stocks.

Where Can You Find Hot Penny Stocks?

Obviously, the answer lies in the electronic quotation systems where penny stocks and their issuing companies are listed. We are referring to the OTC Bulletin Board (OTCBB) and Pink Sheets both of which are not stock exchanges per se.

In recent years, both systems have acquired greater levels of credibility and reliability among traders and investors who were expectedly critical and skeptical of these venues. The criticism and skepticism were borne of the fact that these systems had limited regulatory control over the listed companies – no minimum listing standards, no strict reporting requirements and no auditory authority. These resulted into less than reliable information about the company from its history to its present and possible future and we all by now how important reliability of information is to investor research.

The good news is that with the new tier system of the Pink Sheets, it is now possible to invest in just the Trusted Tier and avoid the Toxic Tier. The job of the investor is made easier because the listed companies can now be separated into the good, the bad and the ugly. Now, all that the investor has to do is to perform technical and fundamental analysis on the penny stocks before actual purchase.