Many people who are investing their money in stocks and bonds have heard of penny stocks. However, while this stock option is a well-known term, you may not be familiar with investing in this option. What are penny stocks? These are the basics that each interested investor should know.
Penny stocks are simply stocks that are low-priced and small-cap. Unlike their name suggests, they are actually not a penny in most cases. This term refers to a cost less than $5. Also, while there are some stocks less than $5 trading on large exchanges like NASDAQ, most investors wouldn’t think of these when they’re asked about penny stocks.
To get a better idea of how to think about penny stocks, think about them as the wild west. This description is used because trading in this stock is much different than most stock options.
While the gains and losses can be great with penny stocks, they don’t get the same attention as other investments and are often difficult to navigate. Also, because they aren’t usually traded on normal exchanges, they can be challenging to buy and trade.
Buying Penny Stocks
Buyers can purchase shares of a penny stock through their normal stockbroker even if it’s not listed on a major exchange. Some of these stocks will be listed on exchanges such as NYSE and NASDAQ and are good options as they tend to be more reliable. Initial investors may want to start with these before branching out. More often, penny stocks are traded on listing services like Pink Sheets and OTCBB.
OTCBB maintains listing requirements for their stocks. Pink Sheets is a system that will provide investors quotation information on stocks. They aren’t registered with the SEC and don’t enforce listing requirements so Pink Sheets carries some extra risk.
Potential Payoff
The reason why investors look into penny stocks is that they offer the ability to have huge gains. Because these stocks are prone to significant fluctuation, it’s possible to gain a huge amount of money with investments. For example, a stock that jumps from eight cents to $8 in two weeks is going to be a huge payoff. There are investors who have shared their stories on how penny stocks paid off for them.
Companies that make the jump from a penny stock to a power stock are rare but when found, they pay out in spades. Of course, the trick is finding the right stock. Keep in mind that there is some risk involved in penny stocks. They trade infrequently so they may be difficult to sell
Conclusions
Penny stocks are risky but they can also make investors a significant amount of money. Even with risks, many investors have found that the potential gains are well worth it. Before investing, make sure to do research on each stock and learn about the company you’re investing with. Some homework goes a long way to avoiding any scams and is well worth your time. Most investors who have a diversified portfolio invest money in penny stocks to take advantage of the fluctuations and they can be a part of a balanced investment strategy.