How much do you know about investing in penny stocks?
What is a penny stock, anyway?
What are the risks of penny stock investing?
Is the return of investment worth it?
Whoa, there! So many questions!
Many who are looking to diversify or create an investment portfolio from scratch are looking into penny stocks.
Penny stocks are shares of a company you can buy for literally, pennies.
In the U.S., the SEC (Security and Exchange Commission ) defines a penny stock as any share that’s less than $5.
Things are a tad different in Europe. In the U.K, any share under £1 is considered a penny stock.
In any case, you get the picture: low priced company shares are also known as penny stocks.
The reason why investing in low priced shares is tempting is the promise of earning big in the long run.
In theory, investing in penny stocks sounds like a dream come true!
You literally invest pennies in your shares and are expected to earn a big profit in return!
Of course you know, that’s not always the case.
The stock market is only predictable up to a certain point.
Risks, money losses and scams are, unfortunately, characteristics that often portray the penny stock market.
Investing in penny stocks:
risks and perks explained
Risks of investing on penny stocks
1. Questionable company history– Unlike blue chip stocks, companies that sell penny shares often have a poor track record or none at all.
This makes it difficult to predict whether or not your investment will earn you money or if you’re just throwing your pennies out the window.
When buying shares of a well known company, you have access to its track record and overall history. Penny stocks, however, rarely offer such information to the public.
2. Mediocre companies – Blue chip businesses can ‘afford’ to sell their shares for ore because by investing in them, you’re more likely to earn a profit (and even get paid dividends).
Penny stock companies, on the other hand, sell themselves short for a reason: they’re either almost bankrupt and desperate to keep afloat. Their products aren’t selling as their competitors’. They’re new on the market and don’t have the funds to grow.
Either way, investing in mediocre companies is risky business!
3. High risk of scam – Unfortunately, it’s very common for penny stock investors to get scammed out of their money.
Since pink sheet companies aren’t required to fill in at least some minimal standards, it’s very easy trick investors into buying.
You’re only investing pennies, anyway, right? But that’s still your money and being scammed into buying is not OK!
Perks of penny stock investing
1. Cheap way to invest – Unlike blue chip stocks, penny stock investing is really cheap!
For $100, you could either buy 1-2 shares of a big company, or hundreds of penny stocks. The price is actually a good perk, especially for people who would like to start investing but don’t have much funds available.
For beginner investors, penny stocks are an interesting way to dip a toe or two into the world of investing.
2. Possibility of investing in a great company – The fact that the majority of penny stocks are low quality doesn’t mean the rule applies to all companies.
You never know which company trades for pennies now but manages to grow into a profitable business later on!
Sure, you could lose money. But you could potentially earn big, even if you invested just a few bucks to begin with.
3. Potential short term earnings – The penny stock market is highly unpredictable. Which is a big risk all investors must take.
However, some penny stocks can double or triple in price after only a few days! If you ‘catch’ the growth in time, you might be able to sell your shares and earn some quick money.
Have you ever traded penny stocks?
How was your experience? Is it worth looking into the penny stock market?
Latest posts by Adriana (see all)
- Hidden Expenses Homeowners Often Forget - March 9, 2020
- Expenses that Your Tax Accountant Can or Can’t Help you Deduct - August 22, 2019
- Personal Finance and Mental Health: When to See a Therapist - August 9, 2019
- Strategies to pay off student loan debt faster - August 22, 2018
- 5 profitable house flipping strategies - January 31, 2018