The answer’s quite simple: penny stocks are equities worth $5 or less per share and not complying with the general rules for being traded at stock exchanges. That’s why they’re traded OTC (over the counter). Penny stocks and their investment prospects have always been a matter of debate among traders. So we’ve decided that it’s time to answer this question here once and for all. Can you get rich investing in penny stocks? Can you go into debt trading them? The answer is – a little of both.
To make it clear for you, we’ll go through both advantages and disadvantages of said equities for a regular or beginner trader. Remember, this advice is viable for you only if you’re not a professional and don’t have proven insights into the companies whose shares you’re about to buy. In that case – penny or not, your chances of gaining profits are high. If you’re in for in-depth analysis – here’s an extensive article from JustForex on what penny stocks are and how to trade them.
Advantages of Penny Stocks
There might be more advantages to penny stock trading, but we’ll list only the biggest and, what’s more important – the most desired ones. The sad thing about them is that all of them are disadvantages at the same time.
- The first place is undisputed, and it belongs to the perspectives of future growth. Even the most minor garage-based one-person operation can grow into a tech giant, and you might be the one to foresee that.
- The volatility of penny stocks is the stuff of legends. Apple’s or Microsoft’s shares price deviates by a fraction of a point per day except for the extreme cases, while penny stocks can double or halve their value overnight, and you might profit from it!
- Low price means that you can buy more shares than with major companies, and more is always good, right? You can become a significant stakeholder of a company and influence its growth in the future!
You might’ve figured already that these three only look like advantages. And now we’ll explain why.
Disadvantages of penny stocks
The only disadvantage of penny stocks is that they are called that for a reason. They were deemed unworthy of being traded at stock exchanges, too cheap, and too unstable to be a solid investment. That’s why most reliable brokers won’t allow you to trade these, and you might end up on some shady websites without any guarantees. All the other drawbacks come as results of the main one.
- Perspectives of growth with cheap equities are way higher than winning a lottery or being struck by lightning but still lower than winning at a roulette table. Yet you’re more likely to lose at roulette, while with penny stocks, you have a 95% chance to receive no profits whatsoever and have your time wasted for nothing.
- Volatility is a double-edged sword here because if something can be called too volatile – it’s penny stocks. They’re also chaotically volatile, meaning that you cannot predict their movements in most cases.
- Low price and trading volume make penny stocks an easy target for fraudsters of all sorts. They can easily manipulate the price because there are not too many shares on the market, and they’re relatively cheap. They mostly employ the pump & dump strategy, leaving regular traders with heaps of inflated shares.
In conclusion, we can say that if you’re not 100% sure what you’re doing, you’d better refrain from trading penny stocks and stick to the more traditional forms of investment.