A Beginners Guide to Penny Stocks: Definition, Characteristics and Investment Tips
As a beginner in trading, the term penny stock will spark curiosity and excitement. By the name, one can assume that these stocks are of a small company and are priced very low. This makes them highly volatile and has garnered the reputation of being a low-investment, high-return deal. Getting lured into investing in penny stocks without knowing anything about it is a mistake that many beginners commit.
Fortunately, many online resources, such as the penny stocks watchlist on Chase, will help you make an informed decision. But are penny stocks really a risky investment? How can one safely invest in penny stocks? You can find the answers to these questions only when you understand the basics of these types of investments.
Understanding Penny Stock
Penny stocks refer to shares of companies with low market capitalization. Previously, any stock with a value of less than one dollar was considered a penny stock. Currently, the US Securities and Exchange Commission has redefined the term to include any share with a trading price of less than five dollars. Even though some penny stocks are traded on the New York Stock Exchange, most of them are found on smaller and less regulated over-the-counter transactions.
Penny stocks are speculative because they are associated with companies with less liquidity. This means there are fewer buys of these stocks, so investors find it challenging to sell them. Moreover, because of its low liquidity, it is also difficult to put an accurate price, making it very unpredictable.
Characteristics of Penny Stocks
As an investor, you may be tempted to buy penny stocks at a lower price and sell them when the prices are high. The dream of buying stocks for a few dollars and selling them at multi-billion dollars will lure anybody. But before you’re on your way to making this dream a reality, you must know about some of the characteristics of penny stocks that may force you to put your endeavors on hold.
- Volatility: Penny stocks are known for their notorious price fluctuations. A small change in the market can lead to substantial changes in the price of the stock. This can have a positive and negative impact on the price.
- Limited Liquidity: Buying and selling these stocks can be difficult due to low demand. Limited liquidity means that investors may find selling them at a desired price challenging.
- High Risk: Due to its volatility, penny stocks come with high risk. Investors can lose all their money and even more with penny stocks.
On the positive side, high volatility also means that these stocks have the potential to generate significant returns. Some investors have gained significant returns when calculating their risks and investing in promising stocks early on.
Tips for Investing in Penny Stocks
While penny stocks are highly volatile, some due diligence can help reduce the risks.
Put a stop loss order: An intelligent investor will put a stop loss order predetermined before entering the stock market. You should know at what price you must exit if the market goes against you.
Research: The investors must check the financial history of the company. You must beware of stocks with little to no information.
Rely on reputable stock brokers: If you are investing through a stock broker, be sure to check their reputation. Be careful about the dubious emails and calls.
Diversify your portfolio: As with any speculative investment, don’t put all your money in one place. Additionally, don’t invest more money than you can afford to lose.
Narrow down your options: You can use a stock screening tool to narrow your trading options. With fewer stocks to research, finding stocks that are reputable becomes easy. You can filter them down based on the industry, size, and other factors.
Conclusion
Penny stocks are stocks of small companies that have a value of less than 5 dollars. These stocks can be a great investment option if you are making a well-informed decision. They are unique and enticing because they have substantial risks as well as substantial rewards. This means they have high profits and losses. Therefore, it is crucial to invest with caution.