What are penny stocks?
So the first question on everyone’s lips tends to be, “What are penny stocks?” Simply put, penny stocks are low-cost stocks. Most sources consider anything costing less than one dollar to be a penny stock while others view it as anything less than five dollars. Wherever you set your benchmark, the point of penny stocks is that they only cost a small amount.
How to buy penny stocks
Purchasing penny stocks works just as it does for any other stocks. You can buy shares through a stockbroker. If you are going to go ahead without a broker, be sure to research the company you’re investing in thoroughly. Learn about their financial health to understand more about how the business is doing.
What are the risks?
Before you go out and buy a load of penny stocks, it’s important you understand the risks associated too. Penny stocks can be highly risky due to low liquidity and poor reporting standards.
When stocks have low liquidity, it means that it can be a lot harder to sell. This could potentially leave you with worthless stocks that you can’t sell on. When it’s harder to find a buyer, you may end up lowering your price and losing out. Alternatively, low liquidity also means that some traders can alter stock prices. In buying large volumes of stock, they affect the share price and make it seem more attractive.
Secondly, penny stocks are not as thoroughly regulated in the same way that blue-chip stock is. The key to a successful investment is to understand enough about your investment to make informed decisions. With a lack of reporting standards, it’s harder to find the information to make these informed decisions.
What are the rewards?
You might be wondering, given all the associated risks, why people would choose to invest in penny stocks. The answer is simple: with high risk comes high reward.
Penny stocks can fluctuate rapidly making them very volatile. Because of this volatility it means that investing in them can be very profitable. You can potentially make great gains from a very small investment if you choose wisely. If you are new to trading and don’t have a large budget it is also a great way to learn more about the stock market.
The key to success is all about choosing the right stock before it soars and keeping a close eye on it. The best penny stock traders will spend all day scrutinising their stock and be able to make many trades at the drop of a hat. With all that in mind, it’s not uncommon to see your stock rocket to 100% of the purchasing price in a short time frame.
Investing in penny stocks can be risky, but also very rewarding. If you do want to take the plunge into the world of penny stocks, be sure to do your research first. For other ideas on how to invest your money and make a profit click here.