Remember when our parents used to say that a penny saved meant penny earned? Well, they weren’t far off from the potential opportunities of investing in penny stocks. For those unfamiliar with penny stocks, they represent outstanding shares of companies whose price per share, or target price, is usually under $5.
These companies have small-to-micro market capitalizations and are often considered to be higher-risk trades when compared to blue-chip stocks that have been around for a while. If they’re riskier, less liquid, and volatile, why invest in penny stocks. That is a completely justified question, but our parents also taught us the relationship between risk and reward.
Penny Stocks To Gain A Market Advantage
Don’t immediately dive into why investing in penny stocks could be advantageous. We should first establish an understanding of why these stocks are riskier than larger companies. For starters, a majority of penny stocks are issued by newer companies with few notches on their belt and no real track record.
Because of this, penny stocks often trade low volume making it harder for investors to sell shares at their leisure. Having said that, any size trade can have a significant impact on the price of the stock because these companies are so thinly traded. Also, the size of these companies allows
You may be wondering where/how to invest in penny stocks. Well, most penny stocks trade on “pink sheets” or “over-the-counter bulletin board” (OTCBB) which represent two electronic stock platforms that allow small and micro cap companies not listed in major indices to be publicly traded.
Now that we have an accord, let’s talk about why investing in penny stocks could be potentially beneficial. Because micro caps make up less than 3% of the stock market in the U.S., the performance of these companies have little to no correlation with the remainder of the market. If the market isn’t doing well holistically speaking, this may not be true for micro cap companies. In addition to this, investors in penny stocks can diverse their portfolios with companies on the rise in their respective industries and secure real first-mover-advantages in the market.
