Penny Stocks, as the word suggests are the ones having low prices and volatile equities which are trading for less than a dollar. They are known for high-risk and highly rewarding investment plans. As said the higher the risk, the higher the profits in terms of commerce.
There are so many small companies that have low market capitalization. They have captured the interest of aspiring investors and have brought them forward in the world where fortune is created or destroyed in a couple of seconds just like the blinking of an eye. Although the charm of penny stocks cannot be denied, the question that stresses the minds is whether they are worth the risk.
To know more about penny stocks, you need to read further.
In the article here, you will learn a lot about penny stocks and explore the rewards it has to offer you, the risk they carry and the strategies you can implement to navigate and protect yourself from the unpredictable and dangerous risks associated with penny stocks.
You will also get to know whether you can choose to invest in penny stocks or whether are they worth the risk for your new portfolio investment.
The Charm Of Penny Stocks
The charm of penny stocks lies in the tantalizing possibility of achieving surprising returns on small investments. It is remarkable to buy thousands of shares at a fraction of a cent. So many renowned investors like Warren Buffett have initiated investing in penny stocks from a minimal amount and have created fortune with wisely made decisions of their investments.
Why Should I Invest In Penny Stocks?
There are so many reasons for investing in penny stocks.
Affordability: Since penny stocks are not costly, they are affordable for all who want to make more money by investing in the stock market. They are accessible to all the investors like you. You can henceforth invest in them with limited capital only. Buying penny stocks in large numbers of shares for a tiny amount of money is remarkable.
Volatile: Penny stocks are famous for the volatility they possess. They are known for the extremely good swings in their prices affected by news, speculative trading and rumours. This nature of penny stocks can bring huge opportunities for making profits.
Growth Potential: There are a few penny stocks that become successful companies while the others do not. If you have real potential to identify the penny stocks that can give you huge returns, you can excel in this market and make exemplary profits as the company expands.
Psychology Of The Market: As per the market psychology, if you owe thousands of penny shares then it is a motivation for yourself. The investors who are already investing in penny stocks, often feel great pleasure for this ownership and their connection with the companies dealing in penny stocks as they have thousands of shares.
However, the potential for returns and risks in the world of penny stocks comes with risk and profits together. It is you who has to make a better choice to rise or sink in this market.
There are so many risks associated with dealing in penny stocks. You need to know them so that you can make a good decision whether to invest or not in this market.
The Risks Of Penny Stocks
No Transparency: The huge risk lies in the non-transparent nature of penny stocks. Since they are not regulated properly and are linked with shell companies. This lack of transparency has brought so many challenges in conducting proper commitment by these companies.
Manipulation and Fraud: There is so much manipulation and fraud that is associated with the penny stock market. One cannot blindly rely on their dealing. There are so many pump-and-dump schemes where dishonest dealers artificially increase the prices of the stocks before selling them and innocent investors are left with worthless holdings.
Illiquidity: Penny stocks are not liquid. That means they are thinly traded and henceforth this has brought so many challenges in buying or selling them at the prices desired. This has led to so many losses and investors have missed several better opportunities before them.
Viability Of Companies: There are so many companies that have been dealing in penny stocks and went bankrupt. As a result, investors of these companies have faced total loss on their capital investment in penny shares. Therefore you need to stay alert while investing in penny stocks.
No Fixed Standards: Penny stocks have been listed on exchanges with minimum standards. This makes it clear that companies dealing in penny stocks may not be meeting the regulatory requirements and reporting for larger exchanges.
No Dividends Are Paid: Investors of penny stocks do not get any dividends as penny stock companies rarely pay them. You are just to rely on capital appreciation for returns. This has again made investment in penny stocks completely risky.
Psychological Stress: Investors who have spent their money buying penny stocks are under emotional stress as they have made wrong decisions while investing their capital in penny stocks.
Navigation In The World Of Penny Stocks
Now since we have discussed the risks in penny stocks, this doesn’t mean all penny stocks are risky and result in bad investments. There are so many strategies that you can adopt and invest for favourable returns. This has helped investors in navigating the risks and dangers of this market and have made huge profits because they could find opportunities while exploring this market.
Research and Due Diligence: If you want to invest in this market then you need to do vigilant research with due diligence. Investigating the financial status of the company, its management team and the business model it has. You should also look for the company’s legitimacy and stay away from companies that exhibit questionable practices.
Diversification: You should not invest all your funds in one company like putting all eggs in one basket. You can diversify your portfolio and invest in penny stocks. This can help you spread risk. Likewise, if you face loss in dealing with one company, you can make profits from others.
Stop Loss Orders: You must plan stop-loss orders to reduce losses. This immediately triggers the sale of shares you have bought as soon as their price drops to a certain level and protects you from bearing huge losses.
Set Realistic Expectations: You need to understand that investing in penny stocks is a speculative investment. Every investment is not a home run and you should not even expect this. You ought to set realistic expectations so that later you don’t deal with emotional stress.
Stay Informed: Before and while investing you should stay updated with what’s happening around in this market via news and events that can affect your investments in penny stocks. News and Market Sentiments can aware you from making wrong decisions and vice versa.
Take Professional Advice: If you don’t know much about the stock market and the risks associated with investing in penny stocks, then you should get help from a financial advisor or broker who can guide you in your financial goals and situations.
Paper Trading: If you are new to this market of penny stocks, then you should choose paper trading first. This is the phase where you can practice stock trading without risking your real money. This will help you gain experience and you will be able to develop better strategies to invest in this market.
Long-Term Perspective: You must prefer a long-term gain perspective, unlike others who wish to have short-term gains in this market. You should make your investment in companies that have sound fundamentals and immense growth potential and not just the instant ones.
Penny Stocks That Made It Big
It cannot be believed that all penny stocks end in losses and failure. There are so many companies that are dealing in penny stocks and have maximized the funds of their investors in penny stocks. Here are a few case studies that can help you do better in penny stock trading. Henceforth, penny stocks have made it big.
Monster Beverage Corporation (MNST): It is a company that manufactures energy drinks famous as Hansen Natural Corporation and has been trading in penny stocks for many years. In 2003, it emerged as Monster Beverage Corporation made substantial growth and became one of the leading companies in the beverage industry. At present it is a million-dollar company.
True Religion (TRLG): It is a jeans manufacturing company that has been dealing in Penny Stocks for years. It has witnessed tremendous growth and has been valued at $ 1 billion before it was acquired by private equity firms.
There are so many other success stories related to dealing in penny stocks. Henceforth, in many cases, penny stocks have brought profits to their investors. All you need to do is stay vigilant, and informed, and do thorough research with patience while investing in the penny stock market.
Are Penny Stocks Worth Risk??
Penny Stocks is not everyone’s cup of tea. They come with substantial risks be it fraud, losses or illiquidity. On the other hand, they also bring extraordinary profits with them and there is the possibility of discovering hidden gems in this market.
If you want to know whether penny stocks are risky or not, then let me make it clear that penny stocks’ risk and profits completely depend on your present financial situation, investment goals and tolerance of risks.
If you are an investor who can tolerate high risk and have the ability to do thorough research, then penny stocks are worth exploring in moderation. On the other hand, if you are a new investor, and are low in tolerating any risk, then we suggest you choose stable investments or traditional investment plans. You are therefore advised to keep away from penny stocks.
How Do Penny Stock Operators Manipulate Stock Prices?
Penny stock operators use various tactics to manipulate the price of the stocks and use pump and dump strategies. You can read how they manipulate information to convince you to invest in their shares.
Select Target Stocks: These operators choose the stocks that are thinly traded or have low prices. These stocks are easy to manipulate by lowering their liquidity and market capitalization.
Dissemination Of Fake Information: Manipulators use fake information about the targeted stocks and exhibit false claims about the companies’ financial conditions, upcoming developments and partnerships. This information is circulated via various platforms like online forums, newsletters and social media.
Creating Excitement and Hype: The operators generate excitement by creating opportunity and urgency for the targeted stock. Aggressive marketing tactics are used to exhibit a significant increase in the price of the share.
Showing Increased Demand Artificially: To boost the price of the stock, manipulators buy shares in large numbers. This creates artificial demand for the shares and leads to an increase in the price of the stock. Their main goal is to attract the investors who invest seeing the rising price as a good opportunity to make profits.
Exit Timing: Once the price of the stock has risen to a certain level, the operators start selling their shares at a profit. This huge sell-off triggers a price decline and henceforth the genuine investors suffer loss.
Loss Of Investors: Once the operators exit from their positions, the price of stocks collapses. The investors who invested by hype and bought shares at low prices bear losses. It is the high level of manipulation in this market.
Abandonment and Repeat: Manipulators immediately shift to new targets and the cycle repeats with different stocks and misleading information to naive investors.
Henceforth, investors need to protect their interests by conducting thorough research and not believing what they see on different platforms. Regulating bodies like the Securities and Exchange Commission play an important role in prosecuting and investigating fraudulent activities.
How do penny stock scams work?
Penny stock scammers use manipulating means to exhibit high stock prices to cheat investors and make their profits. This is how they do it.
Pump and Dump: It is the most common means to do so. Scammers inflate the price of the shares and spread positive word about it and fake information as well. This is done through various online means.
Promotion: Scammers promote a stock as a once-in-a-lifetime deal or a hot tip. They use aggressive marketing tactics to create a situation of urgency so that investors get attracted and motivated to buy stocks immediately.
Artificial Demand: As the investors start buying the stock, the price of the stock tends to increase further leading to fraud.
Dumping Shares: Once the price of the stock is dumped, the scammers sell their shares at profits. This immediate selling leads to further price drop and investors bear loss. Top of Form
In the end, I would like to conclude that penny stocks can never be taken lightly. It is important to first assess the potential risks and rewards associated with them. You can also seek advice from professionals in case of uncertainty. If your approach is cautious and you have a well-informed strategy then penny stocks are worth the risk for you but they are not again everybody’s cup of tea.
Frequently Asked Questions On Complete Detail On Penny Stock Investments
How To Invest in penny stocks?
Penny stocks are very low-priced and volatile securities that offer different avenues for investors seeking potentially high returns but under significant risk. You can invest in penny stock via a traditional brokerage account. Another way is through the Over The Counter market and pink sheet stocks, which can offer a wide range of opportunities for investment. Additionally, exchange-traded funds or micro-cap stocks can provide you with wide exposure in this sector.
Is Penny stock a good investment?
These days penny stocks have become very popular among investors as they can generate rapid development in a short span of time. Small investments in penny stocks can provide good returns. There are so many companies that deal in penny stocks and have been increasing revenue to generate profits for investors in penny stocks. Investing in penny stocks is exciting and fascinating as it comes with good investment gains and losses. A small amount that you invest in penny stocks can grow in high price. A bulk of penny stocks can result in high profits in the near future. Since penny stocks lack liquidity, they may be risky too. For example, a number of penny stocks that you buy at low prices can give you good returns, likewise, they can go into losses also.
Who should invest in penny stocks?
Anyone can invest in penny stocks, as they are the best choice to invest your money if you are new to this market. They provide you freedom to experiment and gain experience. Even experienced investors invest in penny stocks. They are inexpensive, so the cost is minimal and the loss is less too.
What are the tips before investing in penny stocks?
An investor should be vigilant and aware about what is happening in the market. You must do a deep research before investing your money in any penny stock. Explore the stocks of the companies that have a strong business model, growth potential, management is sound and financial statements.
Your portfolio should be diversified. It is not that you invest in share of a single company. You can invest your money in penny stocks of different companies to share the risk.
Use of limit orders: While buying and selling penny stocks, you must use limit orders instead of market orders. This can help you from paying high price than you intend to.
Set stop loss orders to limit your loss. This will automatically sell your stock if it goes beyond a certain level.
What are some common mistakes to avoid while investing in penny stocks?
While investing your money in penny stock you must be aware of the mistakes that you should avoid like falling for hype and speculation. You must not fall for it and do investment wisely based on deep research and analysis. Overtrading is another problem. Since penny stocks are highly volatile, so you should not overtrade in them. Stick to your investment plan and avoid impulsive trading. Ignoring risks is bad because penny stocks are a risky investment and so you should be aware of the risks so that you can manage them wisely.
Are penny stocks profitable for investors?
Yes, to a certain extent penny stocks are profitable but they come with high risk as other stocks.
What is good time to invest in penny stocks?
Penny stocks are a good invest option for short term gains. If you want to invest for long term then go for other plans.
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