Being an investor in penny stocks can have risks, but they also have rewards. Investing in penny stocks requires being knowledgeable about these rewards and risks to be a successful investor.
What are Penny Stocks?
Penny stocks, according to the U.S. Securities and Exchange Commission, are stocks that sell at $5 or less per share. The stocks are also called low-grade securities because they’re a greater financial risk than investments in traditional stocks and bonds. These stocks are investments in small companies with less capitalization that have greater chances of financial loss. Despite this lack of capitalization, the stocks may have better returns if the business does not fail.
Risks of Penny Stocks
There are several risks of investing in penny stocks and a few benefits in pursuing these investments. A major risk of investing in penny stocks are these stocks are havens for scam artists who use spam email and social media to promote get-rich-quick schemes.
Avoid investment advice that you find on internet message boards, social media, and email promotions. Research penny stocks through mainstream financial news and from licensed financial advisers.
Another risk is that penny stocks usually lack the capitalization of larger stocks, meaning the companies that offer penny stocks often do not have the funding to sustain long-term businesses. Finally, penny stocks, due to lack of business capitalization, are volatile and do not have the capabilities for lasting existence.
Benefits of Investing in Penny Stocks
There are a few benefits to investing in penny stocks. These include:
- Inexpensive: The main benefit of penny stocks is they are cheap. An investor can purchase large amounts of stock at low prices instead of buying a few stocks of a more expensive share offering.
- Not a large investment: Penny stock investors don’t invest a lot of their money into these stocks compared to stocks that are more expensive. Penny stocks can be a benefit for small investments if an investor is careful.
- Big Returns: Penny stocks, rarely, can have big returns for little investment. Good returns, however, are not typical of penny stocks.
How to Protect Yourself When Buying Penny Stocks
Considering the volatile nature of penny stock investment, it’s essential to take precautions if you invest in these financial vehicles. Research penny stocks through mainstream financial news and licensed stockbrokers. Avoid email pitches from companies, internet message boards, and social media for penny stock advice and picks.
Do research about the company’s capitalization before investing. Capitalization is the money a business needs to start and grow the business. Companies without adequate capitalization are poor investment choices. Businesses should also have genuine services or products to sell. Don’t invest in businesses without financing or demonstrable products.
Remaining skeptical as a penny stock investor is essential to your future earnings. As an investor, being cautious about the money you already have saved for investment, researching stocks with trusted financial sources, and understanding business capitalization can help you invest successfully in the penny stock market.