Before we delve deep into looking for the penny stock winners we should give a brief overview of these stocks. There are a variety of definitions of penny stocks. Some involve the price, the market cap and others the manner in which these are traded. To simplify things, we can use a combination of the three. For the purposes of this article, a penny stock is a stock priced at under $5.00, with a market cap of less than 5 million and the shares of this company trade Over-The-Counter (OTC or Pink Sheets). Now, that we've gotten the definition out of the way; let’s move on to picking the best ones.

You must've heard the phrase investigate before you invest. We at Paradigm Capital Management think you should investigate, investigate and then some more. It sounds cliché but your level of success in penny stock investing depends a lot on the amount of work you put into the research. Don't be like most people. Don't get into penny stocks because you got a hot tip from a friend or read about someone making a killing in a newspaper. Penny stocks aren't necessarily a quick ticket to riches. They should just be a component of your investing portfolio (not your whole portfolio!).

When we stress about the research involved, we are not stating that it will take 20 hours just to research one stock. The first pick that you make will take more time than the others because there is a learning curve to the process. Once you get the hang of it, you'll be able to filter out the bad penny stock picks from the good ones fairly quickly.

Screeners

We suggest starting your research with a basket of 10 penny stocks first. You can use a stock screener such as the Yahoo Screener or MSN stock screener to filter stocks that fit your criteria. You can start with stocks trading in a certain price range; have a positive Price to Earnings ratio, and a range for the revenues, earnings in an industry sector of your choice.

Charts

Once you have a smaller set of stocks to research, you should go through the stock price charts using websites such as Wall Street Research Net. These will help you get a feel for what range the stock is trading in and with some practice you will begin to see trading patterns emerge. You should keep a list of the stocks you are researching in a Yahoo Finance or Google Finance portfolio. Besides the fact that you will be able to keep all your picks in one place you will also be able to keep on top of company and industry news automatically.

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