What are Penny Stocks?
More than thousands of people switch on their computers in the hope of making money through penny stock online trading. The Securities and Exchange Commission (SEC) defines penny stocks as those stocks priced at $5 or under. However, most of the trading community agree ‘penny stocks’ are any stocks that are traded on Over-The-Counter-Bulletin-Board (OTCBB) or pink sheets.
Advantages of Penny Stocks
- Minimum Capital – You will be buying shares in pennies, so you don’t need to invest large capital to start investing.
- Availability – The stocks are available for the public to invest in. The low-cost capital allows investors to buy as much as they want. If you do good background research or industry analysis and manage your investment wisely, you can have higher profits on penny stocks investment.
- High-Speed – Most of the traders prefer penny stocks because of their high volatility. Penny stocks move at quicker intervals. If you have 1000 shares of penny stock which is trading at $3 and the value just got doubled in overnight, then you’ve very easily doubled your returns.
Disadvantages of Penny Stocks
- High-Risk – Regardless of the cheap price, penny stocks hold extraordinary risks due to their low liquidity. Higher the profit, Higher the risk of losing all investment.
- Low-Quality Companies – The penny stocks are issued by small companies or start-ups. So if the company is near to bankruptcy then the entire investment can be lost in one shot.
- Scams – “Pump and Dump” scams are quite popular in penny stocks where people promote the stock to increase the demand, lead to an increase in price. As a result, that stock will crash and the only ones who take benefit are the ones who purchased the stock before the scam.
- Selling – It is exceedingly difficult to sell large quantities of penny stocks due to their liquidity.
As a final note, whatever type of stocks you trade-in, it is important to completely know about those stocks. This will increase your chances of winning your stock trades.
Do you think investing in Penny stocks is profitable or not? Give your answer and experiences with trading in Penny stocks in the comments section below.
To understand the basics of stock trading, you can read our article on Stock trading: All you need to know about.
If you have any doubts about stock trading, you can ask in the comments section. Our Trading Critique experts will answer it. If you have any personalized questions, you can ask your questions here.
