Penny stocks are stocks that trade below $5 a share. NYSE and NASDAQ issued requirements are considered to be too much for the small companies and not able to meet them.
The smaller companies then end up doing trade through the Over-The-Counter Bulletin Board or Pink Sheet electronic quotation systems.
With this in mind, most of the penny stocks don’t get enough exposure in the investing mainstream as most investors stay oblivious to it. And just like other investments, penny stocks have its pros and cons.
Pros of Penny Stocks
Profits Come In Fast
One of things that attract most of the investors in Penny stocks is the potential that investors can get rich quickly. Penny stocks are issued so that the equity capital can be raised for the small companies that are new to their own industries, companies emerging from bankruptcy or companies that are now growing but still not big enough to be noticed in the investors’ radar screens.
Most of the penny stock companies are small but with big dreams. They are mostly found living in the backwater of the investment world, though if discovered by the aforementioned investing mainstream, the stock price could surge upward within a matter of days or weeks.
For anyone able to make a 5 percent profit on an investment in a year, they will be able to understand the excitement that comes with the possible big gains and losses that comes along with the penny stocks.
Does Not Cost Much
Penny stock shares are cheap; therefore an investor can buy a large holding by giving up a small amount of money.
An example of this will be a company whose stocks are trading at 50 cents a share, an investor will be able to afford 1,000 shares for only $500. If the price reaches $2 a share, the investor will be able to receive a $1,500 profits from his 1,000 shares; and if it does the opposite, the investor will only have lost $500.
Cons of Penny Stocks:
Penny stocks proved to be extremely risky speculative investments as most investors that choose to get their hands on some penny stocks end up with little to no profit at all.
You have to understand that with penny stocks, you will be investing in small business that only might become profitable for the years to come. Or that it could also not get things right and go bankrupt.
An assessment regarding the stock’s potential could also be hard to do since the stocks are not tracked by the mainstream analysts and investment banks and the task of getting company information needed for the said investment can prove to be a difficult task.
Penny stocks only have a handful of investors that owns a lot of the equity. This can then push the price swings into exaggerated lengths. It can also cause the stocks to shoot up in price real quick, also dropping at the same speed.
Penny stocks are a perfect case of the old saying that great reward always entails great risk.
Penny stocks are not meant for the buy-and-hold investor or those that have low risk tolerance. The investors who decide to buy must watch their purchased stocks carefully and sell immediately after showing a fat profit. Or holding on to it for too long can end up being a huge loss.
Frauds and Scams
Penny stocks have been a constant target for fraudulent price manipulations as well as sham promotions. This is due to them being thinly traded, only regulated minimally, and is still unfamiliar to most investors.
Penny stocks are mostly used for tricking the investors to giving up their money.
An example of this would be when the culprits trade the stock back and forth among themselves. This will then raise the price. Before they leave the shares to other unsuspecting investors so that they can get a dishonest profit.
Investing in penny stocks is a tricky decision to make. You should really think about it hard and study before making any final verdict.
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