Anyone interested in making an investment in stock may like the idea of penny stock trading. Although these forms of investment are different from other long term investment from bigger companies, they can be very rewarding for an intelligent investor. Unfortunately, many people lack information on penny stock trading and thus, misunderstand the whole concept. However, you may check Penny Stocks for Beginners in order to understand this concept fully. And before you put in your money without a full understanding of what penny stocks are, it is important to arm yourself with the necessary information on the topic. In this article, we are going to cover the basics so that you can be able to make a decision on whether it is worth investing on penny stocks.
What are penny stocks?
Penny stock is the popular name for micro capital equities. In short, these are equities that sell for a much lower price when compared to the larger blue chip companies. In some markets, penny stocks are considered as equities that sell for less than $5. However, there are markets with other definitions that share a similar meaning. Also, it is important to note that some brokers refer to penny stocks as stocks that sell for a fraction of a cent.
The benefits of trading in penny stocks
Just like in any other form of investment, there are pros and cons to penny stock trading. The benefits include:
Low share prices
As their name suggests, penny stocks are mainly the stock that you buy for less than one dollar. You will even find penny stocks selling for $0.0001. This might seem low, but if you look at the broader picture, you could be able to own billions of shares at that price. And with such a large number of shares under your name, think of what could happen if the share price for a given company rises – You could make huge gains within a very short time.
Great potential for growth
Penny stocks are loved because of their large potential for growth. This is because they have the ability to increase in value by between 50 and 100% in any trading day. It is almost impossible to experience such growth in other types of industries. Even if you have big gains, it would be very difficult to buy a large number of shares that would translate into meaningful profits. This is taking into consideration the gains you make in a matter of hours and not months.
Accommodates small investor
A small investor can have a very rough time when making stock investment in the regular market. This is because a good investment requires a lot of money. However, penny stock investment can be done with a little amount of money and this can give a small investor a chance to trade in stocks. Although other investors can make more money on the conventional stock market, you can level the playing ground by employing the right strategy. Even though penny stocks are small, they hold great potential for small investors to make money.
The big winners of tomorrow
There are many companies on the market that are trading for pennies. These companies have the characteristics of successful business including proven management systems, solid financial systems, growing market share and innovative products that are set to dominate the market.
Investing in penny stock brings great excitement. This is as people make a return of more than 5 percent in a day. This can bring excitement that can motivate you as a stock trader. The big gains and losses in this volatile penny stock market can leave you with a high level of anticipation and excitement.
Turning a small investment into a big one
Most penny stock investments come with a small investment amount. For example, if you have a small amount of money such as $500, you could only buy one or two shares in the mainstream market. However, this can translate into thousands of shares when it comes to the penny stock market. If these shares rose in value, you could make huge amounts of profit.
As we said above, many penny stocks moves very fast. This means that they can increase in value within a very short time. Unlike other stocks that can take years to increase in value, penny stocks only take a few days or even hours to do this. Therefore, with the right investment choices, you could make a lot of money.
Disadvantages of penny stocks
Low quality companies
One of the biggest disadvantages of penny stock companies is that they are low quality companies with bad balance sheets, unstable management and running on huge losses. Most of these companies are either startups or unstable companies in very unpopular industries. Their products are usually of a dying industry with a declining demand. As such, the companies have a grim future with no hope of ever striking it big.
Most people lose money
It is an unfortunate fact that most people who invest in penny stock actually lose money. This is an unfortunate thing considering that you are making an investment in order to make money. To be in the fortunate category of those who make money in penny stock is therefore a hard thing to accomplish. Therefore, you have better chances in other types of investments.
Most penny stock companies fall in the unregulated and risky markets. This means that the traders are free to make their own rules and investment decisions and this may cause you to lose money with little chance for redress.
Unreliable stock valuations
Another disadvantage of penny stocks is that they have unproven valuations that lure you into buying them. Unfortunately, these prices are not stable as they fall with time, causing investors to lose money within a short time.
Penny stock investment can be a good thing if you are sure of what you are doing. You need to conduct a lot of research in order to get the desired results. As we said above, penny stocks come with a higher level of risks that you should learn how to manage.