Penny stocks trade at a low price, have very low market capitalisation and are usually listed on a smaller exchange. Penny stocks in the stock market can have prices as low as Rs 10.
If you are a new investor and just started trading in the stock market, then penny stocks are perfect for you. Since the value of penny stocks are generally low, you would not have to invest much capital.
Penny Stocks have some advantages and risks. So let’s take a look at some of the critical things you should know about these shares before you invest in them.
Advantages of Penny Stocks
- Perfect for beginners- Since the price of a penny stock is generally low, you don’t have to invest a lot of your capital to start trading. This will also help you keep your losses to a minimum amount.
- Generate high returns- Not all penny stocks do not have to fail. There are many attractive companies with sound financials and growth potential that can be traded for penny stocks. One can identify these companies by researching and investing in them, which can generate good returns.
Risks of Investing in Penny Stocks
You have to know about penny stocks because they are very risky even than regular stocks. Investing in penny stock can be a difficult decision for first-time investors. Following are the four reasons that make these stocks difficult:
- Lack of Information- A successful investment can only be made when you have enough information to make the right decisions. Information for penny stocks is quite challenging to find. Companies listed on the pink sheets are not required to file with the Securities and Exchange Commission (SEC), so there is not much information available for penny stocks.
- No Minimum Standards- Penny stocks do not have to fulfil minimum standard requirements to remain on the exchange. If a company can no longer maintain its position in one of the major exchanges, it moves to one of these smaller exchanges.
- Lack of History- Many companies that sell penny stocks are either newly formed or going to be bankrupt. These companies usually have poor track records or none at all.
- Liquidity- Buying a penny stock can be easy, but to sell it would be difficult. As the companies are not very popular, finding a buyer for a penny stock may be challenging. And these may provide opportunities for some traders to increase share price by buying a massive amount of shares which will attract an investor and then sell it in overprice. This will profit the trader who sold the stock but will result in a loss for the investor who bought the penny stock.
In short, Penny Stocks allow investing in small amounts and help to earn a good profit. They are highly volatile in nature, and because of that, the entire investment can be lost. And, a lot of scams exist, which means penny stocks are not for everyone. Good research needs to be done before investing in such stocks.