Penny stocks are quite controversial. Most people hate them. They’re kind of looked down upon, I guess, in the trading community and the investing world. There are a lot of different sides to penny stock investing and, you know, quite extreme opposites.
The spectrum ranges from instant wealth, massive profits, and 20-year-old millionaires, and then on the other side, you have lost investments, scams, illegal activities, and bankrupt companies. And, you know, I mean, the reality is somewhere in between these extremes.
Are penny stocks small companies just getting started or that have been overlooked or undervalued by investors and can multiply a small investment in a very short timeframe? Yes, also true. Let’s not forget that many of America’s and the world’s greatest companies started small, and, you know, typically their investors became very rich.
So yeah, there are risks and there are rewards, just like with everything. So we’re going to dive into it. We’re going to talk about penny stocks.
What are penny stocks?
First of all, what even are penny stocks? Penny stocks are equities that trade below $5 a share. So, you know, don’t be fooled by the word” “penny”—they don’t actually cost a penny. They are issued by companies that are too small to meet the listing requirements of the NYSE or the Nasdaq exchanges.
So they trade through the over-the-counter bulletin board or pink sheet electronic quotation systems. And as a result, penny stocks don’t get exposure in the investing mainstream, and they stay hidden from most investors. Most penny stocks are traded through online brokers.
Pros
Simplicity:
Because these companies are so small, they only have, you know, one or two products. They’re just getting started. So if they sell something, if something happens — an event, a catalyst — a catalyst is something that moves the price either up or down.
So it can be a deal, for instance. You know, if they sign a deal, it’s a big deal, and it’s going to have an impact on the price. Whereas with a company like Amazon or Apple, you know, if they sign a deal, in the grand scheme of things, it’s not that big of an event. It’s hard to work out — alright, what does this even mean? Will this affect the price? You know? So in that way, it’s simple.
Affordable:
Penny stock shares are cheap. So that means as an investor, you can buy a large holding for very little money. For instance, if a company’s stock trades at 50 cents a share, you can buy 1,000 shares for just $500. And if the price climbs to $2 a share, which often happens in the penny stock world, the investor reaps a $1,500 profit on his 1,000 shares.
So this is a very attractive pro for anyone — any beginner — who wants to start out and they don’t have a lot of capital or they just want to, like, test the waters. You don’t need a lot of money, you know, for a big investment. With just a small amount of money, you can start trading penny stocks.
Low competition:
Because penny stocks are, like I said, kind of looked down upon, or, you know, they’re not the crème de la crème in the investing world, it means you don’t have to compete with all these big hedge funds or big massive investors or, you know, bots or whatever.
But, you know, there’s a reason why big hedge funds and whatnot aren’t interested in penny stocks — because, you know, that’s not where you’re going to make your billions, more than likely.
Speed:
Now, I’m not saying all penny stocks move quickly in price, but the ones that do can typically make their price moves within days and not years. You know, with big stocks, more well-known stocks, it can take weeks and years for any sort of major movement.
And this goes in turn with excitement as well, which is another pro. For anyone who has made 5% on an investment in a year, they understand the excitement that comes from the big gains and losses among penny stocks.
Super high profit potential:
You know, even with the bad side—which we’re going to discuss in just a moment — there’s no doubt about it that it’s an excellent way to invest and make profits.
If this weren’t the case, given all the bad names associated with the penny stock market, there wouldn’t be a single penny stock investor around. But since there’s the possibility to make lots of money in a short time, penny stock traders will always trade them.
Cons
High Risk:
But, you know, usually when there’s very high reward potential, there’s also very high risk. Penny stock trading is a humongous risk that, you know, you’re taking.
If you’re trading penny stocks, you’re taking the risk. Most of the money that you make in penny stocks is going to be from shorting penny stocks — because they’re all trash, and they’re all going to fail. Not to generalize or anything.
You know, in penny stock trading, you’re putting your money in small companies that haven’t proven anything yet. Some of them don’t even have a product. Although some of them will be successful, most of them usually reach the point of bankruptcy. However, you never know which one will or won’t make it. So we’re all just taking a chance and hoping for the big gain.
Scams:
You really can’t trust anybody in the penny stock market. They’re going to promise you the world, and, you know, I’m sure you’ve seen The Wolf of Wall Street.
Manipulation:
Manipulation is a big part of penny stock trading. Since they’re not regulated in the same case as blue chip stocks, when it comes to manipulation, you’ll find those who are advertising a stock in the hope of having lots of people invest their money.
Most of them do own shares from the stock they’re advertising, and once they’ve reached their goal — many people have invested — they sell all their shares. This is called the classic pump and dump.
You know, there is a reason that penny stocks have somewhat of a bad name, and it’s because of the scams and the manipulation. And yeah, just the fact that these companies aren’t exactly amazing.
But if you’re not scared off by these cons, you know, and if you do your due diligence and you never invest more than you’re willing to lose, and you have education, then you can make a lot of money with penny stocks.
Disclaimer
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