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Remember that even really bad companies can go up in price, while really great companies can drop in value. Over the long term, however, penny stock companies with weak fundamentals will likely find any price increases to be unsustainable. You should try to find penny stock companies with strong fundamentals, and this acid test is the first step to doing so. The Penny Stock Acid Test Criteria: * Stock Market: which market does the penny stock trade upon? If it's on the Pink Sheets, walk away from it. With the Pink Sheet markets, the reporting requirements, and thus the calibre of the companies, are very low. In terms of markets for low-priced shares, OTC-BB is better, while Nasdaq, Amex, and NYSE are best. * Recent Price Activity: if the shares have more than tripled in the last 6 months, walk away. While the shares may have further to go, there is a greater probability that the penny stock is due for a correction. In fact, you may have only heard about the shares because of the recent price activity, just like thousands of others learned about the same company from family and friends and online talk. Worst case scenario is that it was actually a pump-and-dump or promoted stock, in which case you can certainly expect the share price to come back down to earth. * Financial Strength: compare their debt load to revenues and earnings. How many years would it take, based on their current profits, to pay their debt off? How many times greater are their liabilities compared to their assets? Are sales increasing from one quarter to the next? Sadly, most investors don't even take this step. They buy penny stocks based on the concept or "story" of the underlying company, but never realize that the ballooning debt is great enough to cripple or crush the underlying investment. * Industry Group: if they are in the latest "hot industry," walk away. In all likelihood, you heard about them just as thousands of others did, because they are in a hot topic business right now. This usually means the share prices have been driven up already, and there's more downside than upside. Remember, by the time you hear about a hot sector or hot stock, you're already too late. * Recent Trading Activity: is the daily trading volume increasing in a gradual and sustained way (which is a bullish signal)? Is the total trading volume great enough, with tens of thousands of shares changing hands at minimum, and ideally hundreds of thousands on average. * Volatility: healthy shares usually bounce around a little bit, even without any news or events. You
want to avoid those penny stocks where the shares flat line, and trade lifelessly. Also, be wary of companies with large spreads between the bid and ask prices. While a large spread can indicate a bottom or top in price, it can also be symptomatic of a dead, under followed penny stock. After going through this quick acid test, you still think that your investment idea might be a good one, it's now time take the next step. Really put the company through the paces by doing Leeds Analysis. If it passes this all-important step, you may be sitting on a winning company with tremendous upside potential.
Peter Leeds Penny Stock Credentials Through his newsletter, Peter Leeds and his team analyze and profile the best penny stock companies which may be trading for pennies per share. Peter Leeds on Wikipedia
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