Low priced stocks also known as penny stocks have always being of interest to investors because of their high returns provided shocks are well handled. Today in this blog, I will explain to you what actually penny stock are, their advantages and disadvantages and some tips for those who interested to invest in these stock.
What Are Penny Stocks?
Penny stocks can be defined as the stocks of the small companies that are aimed at the low price per share which usually does not exceed $5. It is also regarded as micro-cap stocks, nano-cap stocks or small-cap stocks based of the market capitalization of the offering firm. They are mainly listed in Over the Counter markets rather than in big stock market because they are on the lower side of the scale in terms of value and trading.
Characteristics of Penny Stocks
- Low Price: In general, the penny stocks are typically quoted below 5 dollars, therefore; they are cheap and thus can easily be acquired by many people.
- High Volatility: These stocks may show big changes in price within a short time span which can be advantageous and/or disadvantageous.
- Low Liquidity: Penny stocks have lower daily trading volumes thus when one intends to buy or sell shares in a particular stock, this causes volatility in the prices.
- Market Presence: A vast majority of the penny stocks are not listed on the recognized stock exchanges such as the New York Stock Exchange (NYSE) or Nasdaq but can be bought and sold on the OTC Bulletin Board or Pink Sheets.
- You may also check out the link - What are the best Indian stocks to buy?
Advantages of trading Penny Stocks
Potential for High Returns
Leverage is one of the key factors investors get attracted to penny stocks since they stand to reap huge profits. Due to the relatively low base of these stocks any small appreciation in price holds the potential of sensational percentage appreciation. For instance, if you bought a share at $0. 50 and it increases up to $ 1. 00 you are able to break even and in fact get a 100% of your money back you invested.
Affordability
The penny stocks are cheap, hence if an individual can acquire or invest in a large amount of shares. This can be very attractive to novice and shop investors who would like to invest in other stocks without having to a closely related large amount of capital.
Probable chance to come across some rather unnoticed and concealed quality of an individual.
Purchasing penny stocks gives the investor the best chance of finding a relatively unknown company which may well triple in value. Apart from small and developing firms, there are even examples of well-known global companies that were own as penny stocks before they began to rapidly grow.
Disadvantages of Investing in Penny Stocks
High Risk
The reason why companies embark in international expansions is because the returns are high, but so is the risk. Since penny stocks are less liquid, the price of these stocks are usually characterized by frequent and extreme fluctuations. The shareholders especially the investors may find it hard to exit their shares hence incurring more losses.
Lack of Information
Dubious penny stocks come from companies that some may not need to disclose their financial records like those that are publicly floated companies. Such absence of material maybe limiting in research that investors may wish to undertake in order to arrive at a rational decision.
Susceptibility to Fraud
Some of the common penny stocks scams include pump-and-dump schemes. During these schemes, the value of a given stock is manipulated through the provision of false and/or misleading information; this is done to the extent where the fraudsters can sell their shares at a profit after they have placed the share’s value at a very high stake for other investors to handle. For more information read our post here - Long-Term vs. Short-Term Investments: Which Strategy is Right for You?
Regulatory Oversight
They are often found in the Over the Counter exchange since it has less regulation compared to the key exchange. Such a lack of control can lead to more often meeting with fraudsters or companies that are not very good at managing their affairs.
Penny Stocks Investment Tips
Conduct Thorough Research
If you are keen on investing on penny stocks, adequate research on the particular company must be conducted. Search for its balance sheets, profit and loss accounts, and any news issued to the public as well as any research done by analysts. Knowledge of business model components, management team, and market potential is important to form a proper opinion about the organization.
Diversify Your Portfolio
However, like most investment strategies, diversification should be carried out in order to minimize risk. Do not risk every single cent into one or two cheap stocks on the market. However, to minimize the effect of a bad stock you should invest in a number of stocks so that if one of the shares does poorly it does not adversely affect your overall investment.
Set Realistic Expectations
Although penny stocks can generate huge profits, one needs to be ready for the worst by expecting to lose as well. Do not risk money which you will need in future and do not expect quick profits.
Use Limit Orders
This is because penny stocks are comparatively illiquid and highly unpredictable so that one can work with limit orders instead of market orders in an attempt to fix the price of the order. This can assist in avoiding rather large price accommodation and guarantee that you are getting the price you agreed upon.
The residents should be informed and the monitoring to be done on a regular basis.
Penny stocks are relatively risky stocks as compared to other types of investment and thus need to be closely observed. Have as much knowledge as you can about the companies in your diversified portfolio and market developments. It is recommended to approach the issue of investment analysis not only periodically, but also on time, with the aim of making the relevant decisions.
Conclusion
Trading in penny stocks can be as thrilling as it can be a highly rewarding investment activity; at the same time, it can be as risky as it is profitable. As such, it is to note that with the right channel of carrying out the research as well as possessing a diverse portfolio coupled with right expectations, one will be in a better position to investing the penny stock. I have also provided reminders, especially to penny stocks investors, to understand that nothing comes with free lunches; thus, investing requires proper strategies.
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