Penny stocks may sound like an interesting investment option, but there are some things that you should consider before deciding whether this is the right investment choice for you.
What’s a Penny Stock?
Contrary to its name, penny stocks rarely cost only one cent. Rather, the Securities and Exchange Commission (SEC) gives this moniker to stocks costing less than $5 per share. Penny stocks are low-priced, smallcap stocks considered to be a speculative investment. Many people consider them to be a very risky proposition. Most penny stocks are not traded on the major exchanges.
How Can You Buy Penny Stocks?
As is the case with any kind of stock, you can purchase penny stocks through a broker — even if it’s not listed on one of the major exchanges. Penny stocks listed on the major exchanges like the New York Stock Exchange or Nasdaq carry less risk than those that aren’t because the major exchanges have stricter requirements. Most penny stocks are traded on listing services like Pink Sheets and Over-the-Counter Bulletin Board. Be cautious of listings on Pink Sheets as they are not subject to SEC regulations and thus are a risky investment.
Why Buy Penny Stocks?
If you stand by the old adage of “no risk, no reward,” then investing in penny stocks might just be the right investment for you. Most advisers agree that they should only account for a very small percentage of your overall financial portfolio. Penny stocks are prone to major volatility, and it’s possible that you could buy a stock for $.06 a share that jumps to $6.00 a share in a matter of weeks. But that sort of scenario is rare. You’re more likely to lose money on a penny stock than to have a meaningful gain.
One major drawbacks to penny stocks is their lack of liquidity, meaning of you want to get your hands on the money you’ve invested, it make take awhile. This is because they have low market capitalization, so there might not be a buyer for the stocks you’re trying to sell.
Other Things to Note About Penny Stocks
Remember it’s buyer beware when it comes to penny stocks. Sure the stories of investors making a ton of money off them are out there, but the vast majority of the stories that you don’t hear involve losing money with these investments. Many penny stocks simply do not have much information available about them, which makes it tougher to make sound investment decisions. There aren’t as many fundamentals and reports available to peruse, and much of that information is rarely from reliable sources. Be sure to talk with a trusted investment adviser who can help determine if penny stocks might be a good choice for you.