Many ideas come to mind when one thinks about investing in penny stocks. The first thought that often comes to mind is whether money can actually be made. This is considering that penny stocks are cheaper than traditional, large-cap stocks.
Penny stocks represent an incredibly volatile market, and shares are typically harder to liquidate. It would seem that all signs point to outright avoidance of penny stock trading. But herein lies a missed opportunity for investors looking for potentially massive gains in the market.
First and foremost, we need to understand what exactly we’re talking about when we say “penny stocks.” For those unfamiliar with the jargon, penny stocks represent outstanding shares of companies with small capitalization. Simply put, shares of penny stocks have a price of up to $5 per share. This is according to the official definition from the U.S. Securities and Exchange Commission.
Though highly speculative, investors have the ability to buy large quantities of penny shares in exchange for less money. This is compared to the same share volume of blue-chip stocks. When investing in penny stocks, any amount of price gain of mere pennies on the dollar can result in lucrative gains for investors. Having said that, this volatility can lso penny stocks to plummet. I don’t need to explain why that scenario is negative.
Why Do Penny Stocks Have More Risk?
Many investors wonder, aside from the obvious facts, why investing in penny stocks is such a risky decision. First of all, small-cap companies aren’t required to adhere to the same rules and regulations of large-cap companies. These companies can fly under the radar. The result is minimal public information available for investors looking into these companies. In addition to a lack of pertinent information in circulation, most penny stocks trade in low volume. This often makes it more challenging to exit a position.
With Great Risk Could Come Greater Rewards With Penny Stocks
For those of you still determined to invest in penny stocks, I applaud your bravery and will guide you on your journey. The best advice that financial analysts often recommend is to do your best to minimize risk when buying penny stocks. If you’re looking to invest in a penny stock, try to find stocks with relatively high liquidity so that, if you choose to sell your shares, you’ll have a better chance of getting rid of them. The “golden rule” for buying penny stocks to choose penny stocks that trade at least 100,000 shares per day, and are valued at no less than $0.50 per share.
As with any type of investment, it is crucially important to do your research and make sure you fully understand what you’re investing in. When buying penny stocks, this methodology is exponentially more important because of the increased volatility and low liquidity of it all.