Anyone familiar with the stock market has definitely heard of penny stocks. In short, a penny stock is priced at $5 or below. Since they’re relatively cheaper than the usual stock cost, they are popular among retail investors or new investors with modest funds. However, before investing, there are a few things to evaluate:
- Understand where to find the right stock for you
- The risk associated with penny stocks and why they exist
- Who should look into buying penny stocks
We will go through these items one by one in this article.
The Characteristics of Penny Stocks
Of course, the most significant
Besides the low pricing, penny stocks also have a few other characteristics. For example, they are not listed in traditional exchange markets. They are also highly volatile and the price could significantly change in a short timeframe. Often, the price could wing multiple times within a day. Penny stocks usually come from smaller, newer companies entering the market, so investors would also buy with the hope of future growth instead of instant return.
Where to Find Them
As we mentioned above, these stocks are not listed in the regular exchange markets. Therefore, you need to go the extra mile to find them. Usually, you can trade penny stocks in the decentralized brokerage systems over the counter. That’s because these stocks come from small public companies and do not necessarily qualify for the major markets like NASDAQ.
The Risks Behind
While penny stocks appear to be a good, quick investment at first glance, there are quite some risks associated with the investment.
Scarce Information
First of all, it could be difficult to gather information on these stocks. Unlike major markets that require companies listed to reveal their financial data, OTC trading requires literally zero information. So you can’t really tell what you’re buying. It’s also hard to make any analysis or prediction on penny stocks. The only thing you can rely on is the pricing and that would require you to actively checking for price changes throughout the day.
Potential Scams
There are scammers everywhere, but lack of information makes the penny stock market a thriving environment for fraudulent behaviors. Some scammers will buy out a penny stock and create a temporary price surge with sales tactics. Once the price reaches their ideal level, these people sell off the stocks, leaving other shareholders who thought they saw return opportunities devastated.
Low Trading Volume
While penny stocks have higher liquidity compared to regular stocks, the trading volume is still quite low. You may also have difficulty finding buyers for your stock at the right time, which could cause you to miss a selling opportunity. Since the transaction can be difficult, your broker may also charge a higher commission on that.
Low Return
Let’s face it. The long-term return on penny stock is low. Most of these stocks never grow in price due to the limited capital the companies are behind. However, keep in mind major tycoons today started as penny stocks too, such as Amazon and Apple. Therefore, when invested properly, penny stocks could yield significant profit in the end.
Conclusion
As long as you have realistic expectations for your penny stock investment https://justforex.com/education/forex-articles/how-to-find-penny-stocks, you will do just fine. IF you’re an active day trader but aren’t ready for a more advanced market, penny stocks are also a decent starting point. Just make sure you’re buying legitimate stocks so you protect yourself.
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