| Things to look
for when examining the viability of a penny stock:
- Financial Health
Understand how much debt the company is carrying and how much
working capital they have or need to grow the company. Many
company’s use investor money just to stay in business.
If the company is not using money to grow, an investor can
not count on any legitimate return.
- Company’s use of proceeds
What does the company intend to do with the money acquired
in an offering. This helps the investor determine how much
of the money is going into things that will grow the company
compared to suspect activities such as loans to insiders,
etc.
Management
Find out the background and experience of officers and directors.
Do they have the expertise to handle the company’s objectives?
Have they walked the road of success before? Make sure a pharmaceutical
company you like is not being run by a guy that has 40 years
experience in the oil industry.
Product analysis
Understand how far along in development the product is. Is
money being raised to market the product, or to develop it?
Read the prospectus carefully to discover whether there is
a viable product to build a company around.
Company tenure
How long has the company been in business? If it is a new
company with little operating history, there is more of a
chance it could be a “fly by night” fraud.
Dilution
Promoters often possess huge numbers of shares at no cost.
When those shares hit the market it can dilute share value
significantly. As a rule, 75% or more dilution is a red flag.
Conflict of interest
Be careful to watch for any transactions among insiders and
promoters that can not be deemed as “clean”. Interest-free
loans to insiders and large amounts of free shares given to
promoters can be warning signs.
Past or present litigation and/or
investigations
Any lawsuits filed or investigation’s done on the company,
insiders, or promoters.
See "Penny
Stock Fraud - a common example"
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