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Are Penny Stocks A Good Investment?

penny stocks
May 25th, 2014

Investing in the stock market is now more popular than ever. Everyone tries to grab a chunk of the market in their own way, either through a blue chip company or as a simple trader. Potential stability is very important in the stock market. A trader should know which stocks to invest in and do a thorough research of the market trends and historical gains or losses if he wants to make huge profits. However which stocks are the right investment for you?
 
If you are new to the stock market, an area you may want to check out are penny stocks. Penny stocks are an area of growing interest among traders these days. How is this different from other stock listed on Pink sheet, and what are the pros and cons involved? These are some of the queries that need to be resolved before investing in penny stocks.
 
What is a penny stock?
 
If the price of a stock comes under $5 then it is considered a Penny stock (or Micro Cap Stock). However, micro cap stocks are based on market capitalization that varies between $50 and $300. Along with that, according to SEC or security and exchange commission, sometimes stocks lesser than $1 are also considered as penny stocks.
 
How safe are Penny Stock investments?
 
People sometimes use a penny stock for investment, but the most important question is whether the investments are safe or not. It is based on the trader’s knowledge about penny stocks. Sometimes experts say that a penny stock is risky, as there is very little information about it. There is a low level of liquidity for it and hence buyers are rarely found for any particular stock. It is also considered that it does not have a low minimum standard. However, some blue chip companies are now working and trading in penny stocks. As the market is volatile, investments can be done with a good number of stocks at a low price and the brokers can trade them easily.
 
Some benefits can also be seen for the traders for the first time, which are as follows-

  • It is easy to trade as it is easy to buy for the purchaser. The penny stocks are not expensive and are within the reach of most investors. However, traders should purchase stocks from a reputable company even if the prices are marginally higher.
  • Lower prices convince people to purchase more shares.
  • Without spending a lot of money, a trader can sell shares at low prices. If a trader is confident about any particular stock, then he can conveniently purchase a large quantity of shares of that company.

Hence, penny stocks are not expensive, but as the information is not always sufficient for the traders, thus it may be a bit difficult to trade. For the first time many traders can use it to get their feet wet. But, in this volatile market, the reputable companies which are listed on Pink sheets would be better choices for investments. As with anything else, it is very important that you do your own research before investing in any sort of stocks whether they be penny stocks or otherwise.


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