If you are new to stock market investing, you need to understand that there are different types of stocks that can be bought. It is important that you understand which type of stocks are right for investing in.
You might have heard the term penny stocks. Penny stocks are securities that trade at less than $5 per share. You might be thinking, “Wow, I can buy a share of a penny stock as it’s a real bargain!”
While you may have also heard wild stories about people who have made money investing in penny stocks. While penny stocks may seem like a lucrative investment, you should know that penny stocks come with a risk.
Trading in the stock market is risky enough, but going through penny stocks may even be riskier. Here’s everything you need to know about this type of stock.
What Are Penny Stocks?
Penny stocks are typically stocks that are offered by small companies. While they are called penny stocks, these stocks don’t usually sell for a penny; however, they sell for a pretty low amount.
According to the United States Securities and Exchange Commission, penny stocks, which are also commonly referred to as microcap stock, apply to companies with low or micro market capitalizations. More often than not, these stocks trade for less than $5 per share not on centralized stock exchanges such as the New York Stock Exchange (NYSE), but on a method known as over the counter (thus leading these stocks to be called OTC stocks).
The companies that offer penny stocks are either new or small companies that have trouble generating interest from investors. Thus, they tend to sell their shares for such a low amount.
If you are looking to buy penny stocks consider looking for brokers and dealers that specialize in penny stocks. You should also consider looking at pink sheets.
Who Buys Penny Stocks?
You might be thinking that for less than $5 a share, penny stocks are cheap and a great bargain. To some extent, this is true, but you should know that investing in penny stocks can be risky.
The persons who usually trade penny stocks are those who are comfortable with taking risks. These are investors who have the knowledge and experience they need to tell the difference between new companies that have potential and those that are of low-value and are not worth investing in.
Persons who are interested in trading penny stocks understand the risks that are present. They know that these stocks are highly speculative. While they may be dealing with small companies that may have just been established, they also know that some companies roll out stocks to commit fraud.
Are There Benefits to Buying Penny Stocks?
Yes, penny stocks are risky, but then again, so is investing in the stock market. Penny stocks are cheap. While you may not have the money to buy a share of Google or Microsoft, you can buy a share from a company that costs $0.30 and wait for it to grow a couple of dollars and then cash out your earnings.
Consider this – for a small investment you can be part of a journey. If you play your cards right, you may discover the next Amazon. You can start from the bottom and see your investment soar.
If you want to have a thrill that comes with a risk invest in penny stocks. Penny stocks can produce a gain that other types of stocks may not be able to produce in a quick manner. Imagine seeing a good return within days or even hours of investing in a penny stock.
What Are the Risks?
Here comes some of the bad news. Some of the companies that sell penny stocks may be companies you never heard about. These companies may be obscure or untried meaning that they might not be ideal investments.
It can be hard to find information about these companies. Transparency is not something you may find with penny stocks.
If you are lucky, you may find yourself having big gains, but keep in mind that volatile prices are risky because they can also lead to big losses. These are losses that can break your bank.
Good Investment Tips
You have this guide and you understand some of the risks that come with investing in penny stocks. Here are some great tips for you to keep in mind.
Don’t just jump into the water with no life vest. Do your research. This can help you avoid scams, as well as avoid penny stocks from companies that have a low possibility of yielding gains.
Invest only what you can afford to lose. Remember that penny stocks are risky. If you want to know which penny stocks are good to invest in, you should look into these penny stocks.
The Final Takeaway on Penny Stocks
If you want to build an investment portfolio and you are thinking about investing in penny stocks, you should know that penny stocks may seem like a real bargain, but these types of stocks are risky.
Penny stocks generally sell for less than $5, so while they may seem like a great investment option, it is important to approach these stocks with caution. The stock market is risky as it is, so you need to play your cards right.
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