The liquidity in penny stocks is low, as are the price of shares— potentially leading to a significant return on investment, if your timing is right.

Most penny stocks belong to small businesses that are working to raise capital from the markets. Oftentimes these organizations do not transform into big operations overnight, but once (and if) they do so investors can expect to be rewarded handsomely. The returns can be signifiant, as are the risks, which is why timing is key.

Pay attention to the money flows

One of the best ways for investors to identify a penny stock that is ripe for picking is to watch and ensure new money is flowing into the stock. Money Flow and Money Flow Index (MFI) are online technical analysis indicators used to observe money flow.

Watch the trading volume

An indication that a penny stock is ready to make a big move is a rise in trading volume, which usually proceeds good news in regards to the business. When this happens, it is likely that the stock price will rise and eventually steady. Therefore, investors do not have a large window of time where they will benefit handsomely from such a move.

Study the company

Review the fundamentals of a company over a prolonged period of time. Pay attention to trends that may reveal the company is cutting costs or sustaining an increase in revenue over time. A well-read investor should know when a company is on the verge of making a profit.

Factor in media coverage

If there is a spike in coverage relating to a specific company, look into it. Typically, an increase in discussions about the particular business are an indication of its potential and the stock could be headed for an upsurge.