There are literally thousands of ways to pick a microcap or 'penny' stock. Most of these revolve around various methods of researching the potential investment, which is often initially the result of a tip or alert from a company specializing in providing that service. Checking out the validity of these tips is a major way to pick a winner, but there are several other methods that can be useful for developing a reliable method for determining the proper configuration for a speculative investment.

The first thing to keep in mind when selecting your penny stocks is the nature of the microcap trading process. Microcap trades are generally done over the counter, using electronic bulletin boards and on-line brokerages like Scottrade or Low Trades. Because the Securities Exchange Commission doesn't require smaller companies, the kind most commonly traded at penny stock values, to file company information with them, the tools offered by the brokers can be invaluable in determining the risk related to a specific stock. The fluid nature of these smaller, less expensive stocks means that they have more inherent risk than most traditional stocks traded on larger exchanges. It also means that the potential for gain is much greater as well.

Much of this data can be found with the trading tools included with on-line brokerages but because of the nature of penny stocks there's a lot that you'll have to look for on your own. Market quotes and prices should be available through your on-line broker as nearly all of the better services offer real time quotes on stocks and many offer analytic tools to easily visualize this data. Other sources include digital newsletters which comb the financial world for data to make recommendations. So how do they make these recommendations?

One of the criteria they use is the recent market activity of a stock. By examining variations in the stock's price over a given period of time, an investor can gain a fair idea of what the stock will do in the future. By monitoring stocks that increase in price over the course of a day of trading, a wise investor can make mid-day trades to exploit these trends. An even wiser investor will look at the company's performance closely to find out what made the stock price change so as to be forewarned about future jumps in price. Tracking the data over a few days can help determine if the stock is going to continue to rise or fall back to earlier prices, allowing you to determine the value at which the stock should be sold to maximize profits. This can also help determine the root causes for price fluctuations.

A vitally important set of data on a given stock is data about the company itself. Never buy any stock from a company you can't figure out what it actually does. Data about the company should be available from the company's website, though this should be filtered through a skeptical lens. More important is the industry, assets and management staff at the company. A diligent investor will track down the members of the company for their histories or examine the markets in which the company operates. Being aware of the changes in a given industry from regulation, new advances or other major variations can inform an investor in what stocks to buy, how long to hold them and the related risks of the transaction.

The specifics of this can grow complicated fairly quickly, but it’s a safe bet that companies selling their stock at low prices are going to be younger and less established. Therefore they're more susceptible to market fluctuations. This sounds bad, but it's a two edged sword: a small company has more to gain from these changes than a large one, at least with respect to stock prices. If the company you're investing in is in pharmaceuticals, keep an eye out for clinical trials on drugs they're offering. If it's a technology company, keep an eye on trade shows and product announcements to see if they've come up with the next best thing.

The general rule for picking penny stocks is awareness, both of the marketplace and its operations and the company you're investing in. Understanding how the two interact requires patience and experience as well as much information as you can possibly gather so that you can make a proper decision on your investment and its risk.