Any stock investor worth his salt wants to buy low and sell high, which is why penny stocks attract investors. They need to choose the best penny stock and identify small-cap or micro-cap stocks that actually have a business that could actually grow. That being said, if they do eventually grow then there is an opportunity for a savvy investor to make a killing especially with an early investment at a low price.
What is a Penny Stock?
While penny stocks generally have a very low market cap, the term in itself refers to stocks which are extremely cheap. Penny stocks often trade below $5 per share. According to the US Securities and Exchange Commission, stocks which are priced less than $5 are penny stocks. In other words, they are cheap stocks and generally belong to companies which have probably just started out.
The cheap price of penny stocks often makes them an attractive investment proposition for many. In addition, many investors actually specialize in penny stocks. They focus on doing a lot of research before investing in them.
Things To do Before Buying Penny Stocks
When it comes to investing in penny stocks, an investor needs to understand the risk involved. Some stocks might not show any gains for a long period of time. In addition to that, not a lot of information is available on certain companies’ lines of business or financial history. This aspect of penny stocks can be a major difficulty for any investor who wants to buy a penny stock. Last but not least, penny stocks almost always have low liquidity. That makes it difficult for an investor to sell the stock if the price goes down. Likewise, it is true if the investor’s position is “in the money” and they want to sell for a profit.
That being said, there have been plenty of penny stocks which have gone on to record huge gains for their holders. Perhaps the trick is to conduct diligent research before buying a penny stock. A sound business, backed up by sound management and a competitive edge are things to consider before investing.