What About Penny Stocks?

Tim Estes |

Stock buying can be risky, even if you’re purchasing the stock of a reputable, established company. While market dips are fairly typical with any stock, most established companies can rebound nicely from any unexpected drop in the market.

So, what about penny stocks? Is there really an opportunity to make a lot of money on stocks that typically trade below $5 per share?

The answer is maybe.

Here are some of the benefits and drawbacks to investing in penny stocks:

Advantages:

  • It can be a worthy investment, particularly for those that have limited funds to invest. While there are a ton of fly-by-night businesses trading for pennies, there are also well-run, financially solid companies trading for pennies as well. The trick is to find those well-run companies.
  • The value of penny stocks never rises above $5 a share, making penny stocks a great investment if you only have a few hundred dollars to invest, since you’ll be able to get much more with penny stocks than purchasing standard stocks from a more established company.
  • It can be exciting, if you have the soul of a gambler. While investing in the stock market is always a gamble, it’s a much bigger gamble if you purchase penny stocks. The advantage of course is that you’re likely investing limited funds.
  • The return potential for penny stocks can be much more significant than it is for stocks from more established companies, with an opportunity to double or even triple your investment.
  • You can experience stock growth in a relatively short period of time, meaning you can see changes within days, not years.

Disadvantages:

  • It’s very easy to lose your money.  Many of the companies that offer penny stocks are experiencing instability, a lack of leadership, or a big money loss. While this is not always the case, it happens frequently enough that is should serve as a warning to those that do not perform their due diligence.
  • It can be hard to find information about the business you may be looking to invest in. While larger companies have their prospectus front and center, it can be difficult for potential penny stock investors to find reliable financial information about a particular company.
  • While the possibility to make a large amount of money fairly quickly is always possible, the same possibility is there to lose your money overnight – the only upside being that you didn’t invest a lot of money to begin with, limiting your losses considerably.
  • Because of a lack of regulation, there are numerous penny stock schemes out there that can be confusing, particularly to those new to the investment world.
  • Selling penny stocks can be difficult, making it difficult to sometimes sell your stock when you want to.

 

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