When making investment decisions there is a lot of material available at your disposal.  From press releases, charts, financial statements, to economic indicators, it all starts to get overwhelming and can cloud your decision making process.  By understanding the different approaches to analyzing a company, you will be able to make a wise decision based on the information you need to know, and cut out the noise.

Fundamental Analysis

The fundamental analysis approach involves researching the prospects of a company, its industry and the overall economy.  There are a lot of factors that determine whether a company’s stock may be going up or down and not all are related directly to the company.  These can be economic data, specific company financial position, or even the quality of management. Let’s take for example Gold Company XYZ Ltd:

– The investment climate in Canada is hot and gold is breaking to new highs. People will pay more to own any gold company.  This will drive the price of Gold Company XYZ higher.

– The entire board of directors leaves the company and all cite “personal reasons.”  This change in management generally signals problems and Gold Company XYZ shares fall in price.

– Drilling results find even higher levels of gold than previously thought.  This type of news will positively affect the financial position of the company and share prices of Gold Company XYZ rise.

Penny stocks can be a bit different from large cap stocks because they are less concerned about profitability.  This is mostly because penny stock companies are in their infancy and not yet at the stage of profitability, so it’s more important to be looking at management experience, underlying sector trends, and results of operations towards profitability.  If all the checks are positive then you’re ready to buy based on fundamental analysis.

Quantitative Analysis

The quantitative approach to investing is typically used by sophisticated investors with a lot of computing power.  Quantitative analysis gathers numerical information on interest rates, industry valuations, and other economic indicators together into a mathematical model resulting in a target price for a company.  If the target price is much higher than the current price, there`s a good chance that the stock will rise to the target price and you can profit from this.

Because penny stocks are usually young companies there is not a lot of statistical information about these companies available for these computational models.  In these situations, it would be best to evaluate data from more mature companies that were once in a similar position to the penny stock under analysis and see if the trend is similar.

Technical Analysis

Taking the technical analysis approach to investing does not involve any information about the company or industry whatsoever.  Technical analysis is the study of historical stock prices and market behaviour resulting in repeated patterns in data.  Because a lot of moves in the stock market are sentiment driven, they often will repeat cycles which can be identified and traded to a profitable end.

Not all penny stocks can use technical analysis as a method of investing.  Stocks trading in low volumes can react wildly in the markets even without any specific catalyst because the spread between the bid and ask prices might be quite high.  Meanwhile small companies with news releases may cause prices to surge or drop based on the news which can sometimes be a surprise and can`t be priced in to the stock.  That being said, high volume penny stocks can behave better in technical pattern analysis and will have much larger percentage swings than large cap stocks.

The three ways of evaluating a penny stock company are quite different.  They all involve specific pieces of information.  By focusing on one you willcut-down on the overwhelming amount of information for your decision.  With fundamental analysis you will learn about the inner workings of the company and the economy it operates in.  Quantitative analysis will give you a specific price target based on a long history of numbers from the company and industry. Finally, with technical analysis you will be able to identify patterns and profit from history repeating itself.  In general it is best to select a strategy based on your investment horizons and risk profiles.

The Canadian Penny Stocks blog is uncovering penny stock picks daily. Stock ideas are mostly focused on the Canadian stock market. You’ll also find investing articles that are a great resource for any investor.

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