Have you heard of Penny Stocks? Let’s get an idea What are Penny Stocks? Are they good for beginners?
What are Penny Stocks?
Penny stocks as the name implies are stocks that are traded for just a few “penny”- that is generally $1. These stocks are offered by companies with lower market caps that trade at less than $5 and mostly on over-the-counter exchanges. That is why sometimes they are referred to as micro-cap stocks, small-cap stocks, nano-cap stocks, or OTC stocks.
Since penny stocks come with cheaper prices, these stocks are less liquid and not well-known among the larger investing public. This makes them liable to a sudden, high level of volatility. Hence, resulting in a high level of risks.
Plus, they have large bid-ask spread, very speculative in nature, prone to high price manipulations, and regulatory scrutiny.
Are penny stocks good for beginners?
Can newbies invest in penny stocks? Are they beneficial to them? Here are important things to understand as a beginner before investing in one.
1. High risk, high return
Penny stocks have won the heart of new investors over the years due to the high returns. Nothing sounds good as buying stocks of companies with a low price that yields high returns. A great way of turning just a few pennies into a fortune pretty quickly. In fact, a return of multiple times its investment value.
Here is the red signal. As said earlier, due to the high level of volatility and speculations, penny stocks is a highly risky investment. Just like it is possible having an explosive gain, a beginner can have an explosive loss when things go wrong or when the company runs down. However, many are ready to risk it all when considering the gains it brings for such a low price.
2. Inexpensive means of owning large stocks
Since they are one of the cheapest stocks in the market, investors can buy a huge quantity of shares at a small price. This is not like trading in large caps where you need a lot of amounts to buy a large number of shares. For penny stocks, you become the owner of a large number of shares without incurring much money.
3. Access to larger market place
For new investors, penny stocks can be considered as a stepping stone to enter larger market listings. It can be a great way to learn about the nooks and crannies of the stock market, how it works, trading techniques, and many more.
Since you are investing with a less amount, the loss is minimal. Plus, you get the first-hand experience of how things are being run before entering the larger stock market.
4. Zero entry barrier
Penny stocks are a trading strategy based on speculation that a company has a potential for growth. This makes it a good choice for anyone new to the world of stocks investing and trading. There are absolutely zero-knowledge, certifications or experience required for penny stocks trading.
5. Addition to portfolio
Penny stocks can help you gain hundreds of percentage gains on investment if things go well. It is one of the best ways to garner quick returns and boost a significant increase in your portfolio.
Since a portfolio should contain an array of investment depending on your risk level, you can as well consider penny stocks to your diversified portfolio. However, it should only be around 5%-10% depending on your risk appetite.
Penny stocks are a way of owning stocks at a less price with huge returns. However, it is also one of the riskiest investment due to the market volatility, less liquidity and high speculations. Hence, beginners who want to delve into penny stocks investing need to tread with caution.