Penny stocks have a bad reputation in the investment world. A penny stock is a cheap stock, usually less than $5 per share, that can either be sold on a typical marketplace like NASDAQ or in more dangerous over-the-counter markets. The problems surrounding penny stocks with fraud and scams generally happen to people who purchase their stocks from unregulated markets like the Pink Sheets or OTC. However, that doesn’t necessarily mean that buying your stocks from a regulated space will protect you from any major losses. Penny stocks are dangerous, lucrative, and often highly risky investments, so should be a small part of any portfolio, alongside more traditional stocks and shares, such as dividend stocks (which you can click here to learn more about), so that you won’t be putting all your eggs in one basket. However, sometimes penny stocks can pay off if you know how to choose the right investments.
The Positives of Penny Stocks
There is a positive side to investing in penny stocks despite what some people might think. For instance, many of the biggest companies in the world started off as penny stocks, with nothing to prove to investors that they were going to become anything more than a wasted investment. There are many fantastic companies out there today that are trading for pennies while they continue to grow market share and build amazing products. If you’re lucky enough to choose the right company, you could set yourself up for huge wins.
Additionally, penny stocks can set you up for quick rewards in the right circumstances. You could end up earning some serious money fast if you bet on the right horse, so to speak. The majority of penny stock investors only need to invest a very small amount of cash into a penny stock to win big if they choose the right investment. This means that you don’t necessarily need to risk a lot of money.
The Problems with Penny Stocks
Unfortunately, while there are “winners” out there in the penny stock world, the majority of the stocks you find will generally come from low-quality companies who simply aren’t good enough to sell their shares for a higher price. Unfortunately, a lot of investors end up losing money rather than making it with penny stocks, particularly when they invest in stocks based on the opinions of “free stock pick” newsletters and other companies especially working to build stocks up for other organizations.
While some penny stocks trade in the standard NASDAQ, NYSE, and other well-known markets, which means that the underlying companies are required to meet specific standards for compliance and regulations, the truth is that the majority of the low-priced shares you’ll find online will trade in the Pink Sheets, OTC, or elsewhere. Additionally, there’s a good chance that the penny stocks you choose to invest in won’t have as much volume or “liquidity” as other major stocks in the market. This means that if you need to get rid of your stocks fast, you’ll have to wait quite a while before you can find someone to buy your shares.
While penny stocks do have their upsides, there are plenty of negatives that you need to be aware of too. The more you understand both the pros and cons of penny stock trading, the easier it will be to protect yourself from a major loss.