Penny stocks are a category of low price and high-risk public companies. These allure the highly conjectural traders with the dreams of easy exponential growth, providing the hopes to double the profits from the investment.
Suppose you’re set on buying penny stocks after examining the risks and other factors involved. It is important to establish a diversified portfolio to decrease the factotum risk of the investment. To diversify your portfolio, invest in many asset classes or shares such as growth stocks, value stocks, blue chips, and others. Pro-tip, consider the amount of investment. These stocks are volatile and skin to cryptocurrency. Avoid putting your heavy savings if you think the holdings are uncertain. Recently, penny stocks have attracted a lot of attention from traders worldwide for rendering huge overnight profits. With reliable information and considering the investment, strategy, and risk tolerance cyclical downturns, contemplate before adding them to your portfolio. On the brighter side, with patience, proactive measures, and optimum research given the risks associated with the investment, the respective stocks can prove a substantial opportunity for profits.
What are penny stocks?
The Security Exchange Commission categorizes the penny stocks as “low priced shares of small companies” (usually under $5 per unit share ). In layman’s language, penny stocks are the stocks of companies with a very small market capitalization that are not registered on major stock exchange markets. Mostly, these stocks are operated through over-the-counter (OTC) transactions or the electronic OTC Bulletin Board (OTCBB) system.
What are the advantages of trading penny stocks?
Penny stocks are valuable avenues to great opportunities and profits if invested after a detailed analysis, especially in trendy industries like marijuana, biopharma, technology, and fintech. Additionally,
- Despite the volatility, these stocks can yield impeccable rewards. With the potential to offer high growth within a short period, these are highly popular among investors and traders.
- You can earn huge profits from small capital investments or a limited budget. Unlike large national exchanges, you don’t need to invest large amounts of capital concerning the market standards.
- Another brownie point of these stocks is that these are easy entries. You do not require certifications or degrees to get started. All you need is a laptop, good internet connectivity, and a brokerage account.
What are the risks associated with trading penny stocks?
Before you commence trading with these stocks, it is important to weigh the risks associated with the investment. Here are the cons of investing in penny stocks:
- Due to the high volatility, a small absolute loss in these stocks can represent a significant loss. For instance, a movement from $1.00 to $0.50 does not look hefty, but it signifies a 50% loss. These fluctuations can render severe damages to investors.
- These stocks are usually less established or renowned companies without transparent records. With mainstream stock market exchanges, it is easy to extract data regarding the performance of the companies you plan on investing in, but with penny stocks, limited data availability makes it difficult to extract information for the respective company adequately.
- With Nasdaq and NYSE, the market is swamped with buyers ready to purchase shares. The trading density with penny stocks is limited whether registered with OTC or other major exchange portals resulting in low and few buyers and marker makers.
Conclusion
Investments always involve risk, and penny stocks are no different. Invest smarter. Many low-priced alternatives to these stocks render promising returns without asking for a large lump sum investment. While you may not be able to double the investment overnight, you will see steady and healthy returns.