What Are Penny Stocks?
Investing in stocks is a popular form of investment that many people are well-versed in. And while some individuals feel comfortable investing in blue-chip stocks, there are others who feel more comfortable investing in penny stocks. In this article, we’ll look at what penny stocks are and the potential reward that comes with investing in these types of stocks.
What Are Penny Stocks?
Penny stocks are stocks that are typically offered in the lower tiers of the stock market. These stocks are generally traded over-the-counter, meaning you must speak to a broker in order to purchase them, instead of trading through a securities exchange. You can expect to pay anywhere between a few cents to a few dollars for the stock of a penny stock company.
Furthermore, penny stocks may not have an established track record or even revenue. As such, investors need to be aware that these investments can be extremely risky and potentially volatile.
The Benefits of Investing in Penny Stocks
Despite the risk associated with investing in penny stocks, there are also some advantages to investing in these stocks.
- Affordable Entry Point
The appeal of penny stocks lies in their accessible entry point. A single share of blue-chip stock can range anywhere between $100 – $1,000. For penny stocks, however, the cost of a single share can be as low as a few cents.
This makes penny stocks a much more affordable option for the average investor, who may not have the capital to invest in blue-chip stocks, but still want to get into investing.
- High Risk, Potential High Reward
The potential reward that comes with investing in penny stocks is attractive to many investors. While these stocks can be incredibly volatile, they tend to be low-cost investments and can potentially offer a huge return on investment.
This is because penny stocks are typically very small stocks, often times in industries that are on the rise. Because of this, penny stock prices are usually more susceptible to market changes and speculation, meaning that when the market does move, penny stocks can move significantly. This can mean increased profits for those investors who can stomach the risk.
- Increased Liquidity
Another benefit of investing in penny stocks is the increased likelihood of liquidity. Blue-chip stocks may be seen as more “stable” investments, but also come with limitations on liquidity. Smaller stocks tend to be more liquid and easier to buy and sell. This can mean that for penny stock owners, capital is more readily available and much easier to acquire with penny stocks.
Potential Risks of Investing in Penny Stocks
Of course, with potential reward comes potential risk. Here are the risks that are associated with investing in penny stocks:
- High Risk of Fraud
As penny stocks do not come with the disclosures and regulatory requirements that accompany other investments, they make it easier for fraudsters to target unsuspecting investors. This includes fraud through market manipulation, or companies issuing false or misleading statements in order to entice investors.
- Limited Information
Many penny stocks do not offer the same level of information and disclosure that bigger, more established companies do. This can lead to limited access to important financial details, leaving investors in the dark as to whether their investment is on the up and up.
- Unpredictability & Poor Performance
Penny stocks are usually highly volatile and can be easily affected by market speculation, resulting in unpredictable performance. Additionally, with limited information about many penny stock companies, investors are left guessing as to whether their investment stands a chance of success.
- Weak Support Nasdaq and NYSE
Finally, many penny stock companies are not listed on major exchanges such as the NYSE or Nasdaq. This can make it harder to gather information or research on a penny stock, and can leave investors feeling unsure when they enter the market.
Penny stocks offer investors the opportunity to make high rewards, provided they can stomach the risk. With the potential reward of investing in penny stocks comes potential risk, including fraud, uncertainty, and weak support. Investors should be aware of these risks and feel comfortable with their understanding of the risk prior to investing. Finally, individuals should always keep their financial goals in mind when deciding which stocks to invest in.
