Have you ever heard about Penny Stocks?
I hear a lot about them daily.
So learn from all of my observation and learnings from this guide
Let’s dive in
What is a Penny Stock?
A penny stock is a common share of a small public company that is traded at a low price.
The specific definitions of penny stocks may vary among countries.
For example, in the United States, the stocks that are traded at a price less than $5 are considered penny stocks, while in the United Kingdoms, penny stocks are only the stocks that are priced below £1 and in India stocks that are priced below Rs100 are considered to be penny stock.
Can you get rich from penny stocks?
Want to become rich quick, BUY PENNY STOCKS!.
This is a perception that a lot of investors still carry with them. Investors are not to be blamed for such a perception; after all, penny stocks do tend to surprise on several occasions- often positively.
Savvy investors who have learned how to make money with penny stock have the potential to make quick profits, but the vast majority of penny stock investors will lose their shirts.
The short answer is yes, but it’s important to remember that trading penny stock isn’t like trading your average stock.
Price Fluctuations of Penny Stocks
When it comes to low-priced shares, most investors believe that stock prices are moved by corporate earnings, acquisitions, new customers, or huge contract wins.
While these influences can have an impact, there are a whole hosts of other factors that can drive the prices of penny stock companies.
Penny stocks offered on the marketplace are often growing companies with limited cash and resources. Since these are primarily small companies, penny stock are most suitable for investors who have a high tolerance for risk.
Typically, penny stock have a higher level of volatility, resulting in a higher potential for reward and, thus, a higher level of inherent risk.
What Makes Penny Stocks Attractive
For investors in penny stocks, the low price is a big draw. Instead of buying 10 shares of a blue-chip company like some X, they can buy 10,000 shares with the same money. That’s where they make the cardinal mistake of confusing price with value.
In reality, stocks that are backed by companies with good fundamentals, financial health and strong management are the ones likely to give good returns in the long run, no matter what the share price is.
So don’t get fooled into buying penny stock just because the price is low.
Also, keep in mind that not all low-priced stocks are poor quality, so, do your basic research on financials and management before buying or rejecting a stock.
“Buy low and sell high” is the ultimate winning strategy in the stock market. But some investors take this saying literally and buy very low-priced stocks.
Since the market cap here is low, they are easily manipulated by operators who lure unsuspecting investors and dump worthless shares on them.
What Makes Penny Stocks Risky
Penny stocks are high-risk securities with small market capitalization that trade for a low price outside major market exchanges. A lack of history and information, as well as low liquidity make penny stock more risky.
Why Penny stocks can be hard to sell
You don’t make any money on an investment until you sell that investment and realize a gain on the sale.
Penny stock bring together the dangerous combination of low liquidity and high volatility.
They’re often hard to unload, due to all of the above and because the market for these securities is smaller.
At the same time, they can be subject to wild and rapid price swings, which means the price could shift dramatically before you find a buyer.
Individuals can also decide to invest in other investment options which are better suited to their objectives and risk appetite.
Mutual Funds are one such option which is increasingly gaining popularity in the market. MF’s are investment pools which involve multiple individuals investing in a single fund which is then used to purchase securities.