Are Chinese Penny Stocks A Better Investment?

You may be interested in trading shares that cost less than better-known businesses on Wall Street, but some traders hear better news about start-ups in China. If you are a beginner to the speculative-trading world, you may be wondering whether Chinese penny stocks are a better investment than those shares that exist in other parts of the world. There are several factors to consider, when contemplating investing in this booming economy.

How does communism affect Chinese penny stocks?

Some people still worry about the communist reputation of China, but it seems to go against the economic successes that are being heard about businesses that start-up there. Is it possible that successful start-ups can be taken away from rightful owners and become property of "the State"? This is only one of the possibilities that may scare some overseas micro-cap share traders, but there are a few others things to think about.

Have Chinese penny stocks reached their peaks?

Like other countries in the global market, Chinese penny stocks could be nearing the top, as the global economy weakens. If you listen to leading analysts, there are lower growth estimates for China's economy, in general. Many investors may have thought Chinese companies were the only places to seek refuge for their money. With a less-optimistic outlook, it's possible they over-bought and profit-taking can start taking place at a more rapid pace, based on these assessments. You have to decide whether Chinese penny stocks are near their top or bottom trading range.

What about accounting methods or upper management of China's companies?

You may wonder whether China's companies follow the same types of accounting principles, commonly practiced and if you can be sure the financials or growth estimates are realistic or true. It's possible you may see very low inventory levels or large cash loans from owners, which might not seem to make much sense. Couple accounting questions with the fact most beginning investors can't go visit an actual plant in China or learn much from the Internet and you can see why investors in hot "nano" shares might be leery of Chinese penny stocks.

How can you perform due diligence to make sure these are legitimate companies?

In your research and due diligence, there are a number of things you can do, including traveling to China to see companies or talk to the hedge funds that invest in them. These might not be logical options for the average investor, but you can find information in blogs and forums by those that have performed this extensive research. If you listen to some of the forums, you might hear investors boasting appreciation of 1000% or more, on certain shares.

Not all micro-cap shares in China offer these returns, but they are subject to "pump and dump" schemes, just like domestic shares. Chinese penny stocks are traded on legitimate entities that are growing as part of an innovative or robust sector of China's economic boom, however. You may consider full-service broker accounts or subscribing to unbiased trading newsletters specializing in China trading, for expert advice. You could also consider an ETF in Chinese penny shares, thus engaging the services of professional investment managers and analysts.