There’s a lot of ways you can invest your money. You can be a risky stocks trader or just a conservative saver who invests most of his funds in Treasury Bills. You can also be both by putting your money in penny stocks. In this article, we will show you some of the important things and tips you need to learn before investing in penny stocks. There are things you have to understand before investing in penny stocks to succeed in the venture, and this article will be your ultimate help.
Why Invest in Penny Stocks
It’s hard to invest in something that you don’t understand. Investing in penny stocks is no different. The first thing you need to learn about investing in penny stocks is that penny stocks are for risky traders who want to trade at prices below $5. Penny stocks are those companies whose share price fall below the average $5.
The main reasons that people choose penny stocks for their initial investment portfolio are because they require less capital, and they offer huge payout. If you’re new in the stock trading game, you don’t want to risk a lot. Penny stocks offer the best way to meet a beginner’s desire to join in trading without making oneself too vulnerable to losing all their capital.
Of course, penny stocks also offers a huge payoff once you hit the right company to invest. Its ROI can even get its investor about 300% in returns. This fact is what makes investing in penny stocks a considerably viable option for stocks trading beginners.
What Penny Stocks To Invest In
Some of the types of penny stocks to pick today include Zombie Penny Stocks, Ruble and Ruin, and Hot Topic. Zombie Penny Stocks are those companies that are still active in the trading exchanges but have been defunct and lifeless for so many years. These companies are so inactive that no one will even bother to file the official paperwork to remove them from the stock market listing. They’re still trading for so many years even when they don’t show any promise. Hence, the Zombie label.
Rubble and Ruin penny stocks are those companies whose share prices drop because their businesses went bankrupt for several reasons. They could be because of a misguided idea, or a lawsuit or any controversy that caused their ruin. These stocks’ prices reflect the state of collapse the businesses are in.
Here’s a list of the other types of Penny Stocks available in the market today:
All these companies function in the same way in that these have meager prices because people didn’t give them much worth. Their standing in the market is not promising, which makes them prone for speculation.
The differences between these types of penny stocks are in the way they are valued. Some penny stocks are low priced because of negative backlash. The others have low trading prices because of slightly positive reasons, such as they’re just new and their value isn’t proven yet.If you’re a beginner, you may get more out of your money if you invest first in Undervalued penny stocks, since according to X, they have more chances of capital growth.
According to Securities and Exchange Commissions, you can easily pinpoint a penny stock by looking for anything that is priced under $5, but there are still varying definitions about this. Some may even define it with a cut-off point of around $3, while others may see penny stock only those with less than $1 value.
Investopedia considers any stock trading in the market that is listed on the over-the-counter bulletin board and pink sheets. With these definitions at hand, you can see that in general, penny stocks are simply worth way less than the average stocks you can see in big-ticket companies.
The prices of these companies, however, can rise to profitable values if the company does turn around and recover from the factors that caused their low market price. The factors that make these prices fall and rise are numerous and unpredictable.
How to Invest in Penny Stocks
If you’ve now decided to invest your money in Penny Stocks, then here are tips that you should consider before putting all your money in low-priced companies.
1. Understand your risk tolerance
Not all traders are made equal. Some traders can’t withstand the pressures of losing all their capital in one day, so they tend to go for conservative stocks. Other are too risky, and these traders can be categorized as aggressive. Penny stocks require aggressiveness because they’re too uncertain. Make sure you know what type of trader you are. This is the tip that works best among penny stock traders in Reddit.
2. Do your research
The values of penny stocks can rise and fall quickly, and the changes favor those who are in the know. Brokerages and stock traders can’t divulge relevant information about the penny stocks you are buying, so do your research. You can see this tip being effectively used by billionaire Warren Buffet himself.
3. Be prepared for a lot of stress
Preparing yourself to the time-consuming hassles and stress of penny stocks will do you some tremendous good. Penny stocks can bring out a huge payoff, but this won’t happen overnight. This is the kind of good tip that has worked best for the people who shared their success stories to different online forums.
4. Take everything with a grain of salt
Another tip that worked best for the online trading website Market Watch has something to do with deception. Brokers will lie to you and overvalue penny stocks, so make sure you know what and where to put your trust. These brokers may assign disclaimer to their advice, but they will get you in with technical jargon that will cause you to lose considerable amount of your capital.
Are Penny Stocks a Good Investment?
It’s hard to say whether penny stocks can be good for all, since not all traders have the same tolerance for risk. In this section, we will dissect penny stocks according to their Pros and Cons, so you’ll have a better understanding of the payoffs and threats.
1. They require less capital
It’s worth repeating in this section the statement that you don’t need a lot of capital to invest in penny stocks. This makes it ideal for trading beginners who are still testing the waters.
2. They offer huge payout
In the book of Nassim Taleb called Black Swan, it was stated that Black Swans are rare, improbable events that have tremendous payoff. Penny stocks offer the opportunity to be hit by these favorable Black Swans.
3. Plain old excitement
For anyone who has received at least 5% of investment growth a year that came from Penny Stocks, this type of trading offers a lot of excitement. For those who think that stock trading is just for recreations, penny stocks are a good bet.
1. Low probability of payoff
You can’t expect to get rich and acquire hundreds of millions overnight from penny stocks. You have to play the waiting game. This makes penny stocks less ideal for those who want quicker returns.
2. Low-quality companies
It’s hard to put all your money in the proverbial penny stock baskets. These penny stock companies have low value due to a train-wreck of factors that the companies suffered and that caused their downfall. You’re betting against high odds of success for your money to grow if you’re putting it in penny stocks.
Investing in penny stocks is a fun, educational way to begin trading on stock exchanges. They may not be highly profitable in the short term, but if you pick the right penny stocks in which to put your capital, you may have greater chances of hitting the jackpot. You also have to understand that investing in penny stocks requires time, research and vigilance to filter out the noise coming from brokers who overvalue penny stocks.
As a form of a summary of the information shared above, it’s safe to say that penny stocks are only good for risky traders who don’t mind losing all the capital they put in money stocks. Based on an assessment, it may be rational to put a bit of your money in penny stocks with the hope that if that penny stock flies, you have a share of the pie. So what do you think of penny stocks? We’d love to hear your experience, questions, and thoughts about penny stocks.