If you’re interested in diversifying your investment portfolio, it’s a given that you’re going to look for investment opportunities that will serve to enhance value while offering the safety of a range of vehicles, such that your risk of losing wealth should any portion of your overall portfolio go south is mitigated. Penny stocks might have a lower share price than other types of equities, but that’s the only difference when the subject is diversification: if you’re interested in diversifying your penny stock portfolio, you’ll be performing exactly the same exercise as you would if diversifying a portfolio made up of any other kind of investment products. The key is to seek portfolio enhancements over a range of companies and industries, spreading out your chances of earning significant gains while simultaneously minimizing your risk of loss, regardless of whether you’re investing for the short term or the long term, or whether you’re investing for growth or for value.
One proven method of portfolio diversification is to specifically seek out penny stocks in different industry segments, with different trajectories, and to purposefully place varying percentages of your available funds into each. It’s a good rule of thumb to try to limit your investment into any one stock to a maximum amount equal to 10% of your portfolio (some experts would argue that the cap should be at 5%), so that your risk profile remains as diverse as possible. Correspondingly, the companies into whose stock you invest your funds should be equally varied. Begin by researching businesses in industries which you understand, of which you have special knowledge or expertise or, at the very least, which hold a special interest for you, because the knowledge you have of the particular industry segment will be of great assistance in helping you to identify value when you find it. Regardless of the industry in which you begin to search for picks suitable for diversifying your portfolio, you should pay heightened attention toward identifying unpopular stocks that reflect this good value: when a stock is under-appreciated, regardless of its market capitalization or of which exchange it trades on, there’s extra room for growth in both share price and volume and thus, increased chances of trading for gains. Investing in under-appreciated gems is a prudent strategy for portfolio growth which you can literally bank on.
For those retail penny stock investors who lack specific industry knowledge of any kind, and who choose not to diversify their portfolio by investing in a mutual fund or ETF specializing in penny stocks, a solid guideline would be to seek to identify a target stock in each of a minimum of five separate business segments, being sure that the segments on which you focus your attention neither overlap, nor are highly seasonal. If you can further sub-diversify by finding stocks that individually are associated with differing degrees of risk, then you’ll be well-positioned to diversify your penny stock portfolio on more than one level; further, if these businesses play out in varying geographic regions, then you’ve added even another level of diversification.
Start by taking a closer look at penny stocks issued by companies which occupy space in growing sectors, such as technology, alternative energy and healthcare: such businesses suffer little to no seasonality and, depending on their specific niche within their category, shouldn’t be too dependent on any one particular customer or vendor for the on-going rolling out of their business strategy. Other sectors to consider could be as varied as mining, transport/logistics and even entertainment. When diversification is the issue, the specific industry is less important than the overall mix of equities which you are bringing together in your one basket of investments.
You’ll have to roll up your sleeves and dig deep in order to sift through all of the noise and find the penny stock picks that will make the perfect additions to your portfolio. Focus on certain companies’ stock for value, and on others for growth (another level of diversification). You’ll have to read balance sheets and income statements, as well as a host of investor materials, in order to weed out the non-contenders in the industries which you’ve chosen. Then, once you’ve arrived at a shorter list of investment candidates, you’ll have to sharpen your focus to narrow things down to your optimal investment choice. Pay close attention to this methodology, because with the next industry you move on to, you’ll need to perform the same exercise again.
It’s of great importance to this process to ensure that your research and analytical skills are sharply honed. Take a very close look at your chosen picks’ stock history to make sure that you’ve gotten a meaningful feel for its normal rhythm and movements: without knowing what’s typical for the stock, there’s no way to recognize when the stock may be trending, or whether it even has prospects to do so. Plot the stock’s history over time on your charts (or access charts from your full service broker or an online finance site such as yahoo finance or free real time), and then plot its most recent movements, comparing the two; be sure to look for any recognizable patterns which may help you to evaluate the optimal time to buy in, or to classify the stock as a non-starter. Investigate market cap, volume, net asset value, P/E ratio and book value, and compare these to industry norms to see where the company is situated in the pack. If the trend for growth is evident and the stock appears to be undervalued, chances are good that you’ve found a keeper. To verify your hunch, then, spend just a little more time looking into company management to gauge whether they’re generally considered competent, and whether they’ve got the chops to lead the company over the threshold to the next level of success, and don’t forget to check with the SEC to read company filings, if any are available. If all looks good, place your order, and remember: while all forms of investing are associated with certain risks, the risks of penny stock trading are significantly lower than when trading in other types of equities simply because the costs of buying in are so much lower. Hold your position while continuing to monitor your shares closely: if your initial analysis proves correct and the shares move in the right direction, you then have the luxury of deciding whether to increase your holdings, or whether to simply bask in the satisfaction of knowing that you’ve added portfolio value and diversified at the same time. When you’re done patting yourself on the back for a job well done, get out there and do it again with another pick from another industry, reinvesting your gains to maximize portfolio growth. After all, isn’t that what it’s all about?