Many investors new to the stock trading market make the mistake of thinking that penny stocks are the simplest form of trading. The name is deceptively appealing. After all, what could be so scary about paying a couple of pennies for the chance to earn big on a growing stock? Unfortunately, penny stocks aren’t quite as simple as they seem.
Instead, these investments are speculative and risky in nature, which means that you can earn bigger rewards, but lose more money too. Penny stocks don’t have to trade at a value of a penny. While definitions vary, most experts agree that a penny stock can be worth less than $5 per share. Usually, the stocks are traded on the Over the Counter bulletin board or pink sheets, rather than bigger stock exchanges like NYSE.
Penny Stocks are Riskier than Normal Stocks
The most important thing you can learn about penny stocks is that they carry more risk than regular stocks. Their low price and high volatility make penny stocks an appealing, but sometimes worrying investment. Additionally, even the best penny stocks generally have less liquidity than other stocks, because there are fewer shares trading hands every day.
Although penny stocks are a unique way to diversify your investment portfolio, they work in the same way as any standard stock. The main difference is that you won’t be able to buy penny stocks as often on the common stock exchanges, and these investments will be subject to higher price swings – making them a more dangerous way to spend your money.
Of course, the volatility of penny stocks also means that you could earn serious rewards if you invest your money in the right place at the right time. Many experts argue that it’s difficult to pick a good penny stock, as they’re often made up of unproven and highly speculative companies. However, if you do strike a lucky stock, then the potential benefits are astronomical.
Are Penny Stocks Worth an Investment?
Penny stocks are complicated. One thing that might put your mind at ease is the fact that penny stocks are watched closely by the Securities and Exchange Commission. This means that if prices start to spike too dramatically, they’ll be subject to investigation. Of course, this might not help you much if you’ve already invested your money in a company.
The volatile nature of penny stocks means that they’re very risky, but they have the potential for high rewards too. Penny stocks are worth it when you understand the risk you’re taking, and you make sure that you only spend money that you’re comfortable losing.
Just like with any stock strategy, it’s important to set realistic expectations to ensure that you don’t set yourself up for a painful experience. The odds are usually against you with penny stocks, and you may find yourself facing some losses. However, if you start your investments small, and keep an eye on the market, then you could also choose stocks that set you up for a much bigger wealth portfolio in the future.