What Exactly Are Penny Stocks?

Penny Stocks

Penny Stocks might sound like another buzzword you keep hearing about but don’t exactly know what it means, but penny stocks have a simple definition. As the name suggests, penny stocks are stocks that could be bought for cheap or for “pennies”. According to Investopedia, penny stocks are “any stock that can be traded for less than five dollars”. Penny Stocks are usually associated with small companies that are relatively unknown and therefore do not attract many buyers. Their low prices are a result of them not having a place in the market or their newness which means they have no authority in the market.

Think of it as opening a business and charging as little as possible just to get people in the door. As your business grows and you have a loyal customer base you can then increase your prices because you have established yourself as a reputable business. On paper, Penny Stocks sound like the best way to get rich quick. There are all of those stories about investing in a company early and reaping rewards when the company becomes hugely successful. One prime example of this is Netflix.

But it isn’t that simple.

Before You Rush Out To Buy Penny Stocks There Are Some Things You Should Know

Unlike big companies, there is the option for penny stocks to double over a short amount of time hence receiving a profit in a shorter amount of time than traditional stocks. With the turnaround time that can exist with penny stocks, investors can often use these returns as daily income as opposed to waiting years for a payout.

This is what attracts investors. Due to their low price and accessibility, penny stocks attract many novice buyers, which unfortunately means that many of these buyers are susceptible to scams and dishonest businesses. Therefore, rookie investors should be cautious when purchasing these stocks. It is not advisable to invest your entire life savings in these stocks and it is also recommended to activate a stop-loss order.

Why It Is Risky

Investing is a risky business but there are higher risks involved with penny stocks. As penny stocks are attached to new businesses there is not much information available about the company. This means there is no way to confirm the validity or honesty of the company. There is also no historical data or track record of the success of the stocks or the company to review. Also, the same reason why penny stocks are attractive is the same reason why they are so risky. As a small business, the probability of them failing or disappearing is higher than that of a larger company. Trading may not be that easy but a stock-picking service like Automatic Fortunes can help you make a smart decision.

Are They Worth It?

The short answer is that they can be, there are many success stories out there however those success stories may fail to mention the number of times they failed. Novice investors should enter the penny stock trading world cautiously. They should also be prepared to fail. When investing, one needs to be prepared to fail at least once or twice before ever gaining a profit. Although one can find success in penny stocks the investor needs to have a high tolerance for failure and be prepared for it.

What You Should Do

Research, research, research… This is the most crucial thing you should do before deciding to invest in penny stocks. There are many resources out there that you can use to guide you. It is very important to educate yourself before making a decision.