New To Penny Stocks? Your Questions Answered
Look, we aren’t born experts on the topic of penny stocks. But we have all seen a lot of things involving these cheap stocks. The fact of the matter is that low priced stocks like these garner many questions.
Furthermore, if you’re new to penny stocks, you most likely have more questions than answers due to stark differences in sentiment surrounding these stocks. At the end of the day, I think it’s all coming down to risk and how you manage that risk as an investor.
Are people getting burned after buying penny stocks? Most likely so. But are people making money with penny stocks at the same time? I think the answer is yes. The major difference comes down to how people treat these companies. So let’s break down some of the more frequently asked questions when it comes to learning about penny stocks for the first time:
Penny Stocks FAQ
What Are Penny Stocks?
The first question many ask: What is a penny stock? At the heart of this topic is the standard definition of penny stocks. According to the overseeing body of the stock market, the Securities & Exchange Commission or SEC, penny stocks are equities of companies that trade at a price of $5 or less. Though, based on popular opinion, retail investors classify penny stocks as those which trade below $1 per share. No matter where you stand, the definition of a penny stock equates to companies with cheap stocks trading on public exchanges.
Are Penny Stocks a Good Investment?
This is another question based on personal opinion. However, most will agree that penny stocks are high-risk investments and shouldn’t take up a major piece of your portfolio. However, as the sole decision-maker of your investment goals, it’s totally up to you. At the end of the day, you need to understand that the lower the price of a stock, the more volatility plays a role.
If a stock is valued at $1, a move of $0.05 equates to 5%. If a stock is valued at $0.10, a move of $0.05 equates to 50%. You be the judge. Warren Buffett’s strategy is to invest in companies that have an opportunity for growth and show firm value prospects. Most penny stocks are start-up companies with minimal (if any) revenue and speculative business models.
Can You Make Money With Penny Stocks?
In short, yes, you can make money with penny stocks. How you make money depends a lot on how you trade. If you are greedy when a stock is up 100% and you think it might run to 200%, you might be at risk of losing your whole position.
If you have a set plan and take profit when stocks are up a certain percentage (some start at 20%), then you’ll likely be at better odds o capitalizing on smaller moves. Your trading strategy will determine your potential to make more (or less) money with penny stocks.
Novice investors tend to treat penny stocks like the lottery. They risk whatever they can to make money. But they don’t take into account a trading strategy. At the end of the day, if you treat penny stocks like a lottery ticket, expect to “win” at stocks just as much as you win at the lottery. On a side-note, if you win the lottery a lot, let me know; we got to talk.
Are All Penny Stocks Risky?
Penny stocks are risky by default. Most companies with stocks trading at these low levels have risky business models. They likely have minimal to no revenues and their growth prospects are typically slim.
However, when it comes to the “long-shot” play, penny stocks are like Rocky Balboa against Ivan Drago when they hit it big. Though some penny stocks like FNMA and FMCC are government-backed, it doesn’t mean they are any less-risky than other penny stocks. Keep this in mind.
How Do You Buy Penny Stocks?
When it comes to buying penny stocks, it’s as easy as a few clicks of your mouse. Compared to the old days of buying stocks, you no longer need to do it by phone. Today, you can open up an account at ETrade, TD Ameritrade, Robinhood, Charles Schwab, Interactive Brokers, or a number of other online brokers to sell or buy penny stocks. Something to keep in mind is: how quick is my trade execution and what fees are involved with buying penny stocks?
Many times these two things can be different. When it comes to free penny stock trading platforms, the “no fee” structure means you have to give up other things like faster trades. Compared to ETrade, free platforms may execute trades slower. Needless to say, buying penny stocks isn’t as hard as one might think.
Why Penny Stocks?
These are just a few of the most frequently asked questions when it comes to penny stocks. Ultimately you need to ask yourself why penny stocks are what you’re looking at. Is it because of the high-risk, high-reward mentality? Maybe it’s because you saw something in a movie.
On the other hand, maybe you’re a pro at trading and penny stocks give you opportunities to take small sums of money and turn that into big profits. No matter what you think about penny stocks, the fact remains: companies go public to raise money and in doing so, offer up opportunities for investors to make money.
The class of cheap stocks regarded as penny stocks have become a mainstay for those looking to invest smaller capital with the hope of bigger returns. At the end of the day, it’s up to you to decide on your own strategy and determine if penny stocks are right for you.