When investing in the stock market, it’s important to create a diversified portfolio to reduce the overall risk of your investments. Diversification can be achieved by investing in different asset classes in different industries, as well as through various types of shares, such as growth stocks, value stocks, blue chips, and penny stocks, among others.
Recently, penny stocks have attracted a lot of attention from traders looking for ways to make profits, and while there is discussion about the risks of investing in penny stocks, you might want to consider adding them to your portfolio if they fit your strategy and risk tolerance. With patience, dedication and knowledge of the markets and the risks associated with these shares, penny stocks could provide great opportunities for profits.
What are penny stocks?
The American regulator, the Securities Exchange Commission or SEC in short, has defined penny stocks as “low-priced shares of small companies” (usually under $5 per share). While there are some penny stocks trading on important exchanges like the New York Stock Exchange (NYSE), they usually trade over the counter.
What are the advantages of trading penny stocks?
Penny stocks can be great opportunities to invest in a small company in its early stages, especially in trendy industries like marijuana, biopharma, as well as technology and fintech.
Shares under $5 are also an advantage for those who are looking for a way to create an investment portfolio with a small or limited budget. Penny stocks also usually attract first time investors who are looking to start investing without spending a lot of money at first.
As these stocks are usually quite volatile, gains with penny stocks can be quite rapid, allowing investors to make profits quickly with a small initial investment when the company’s share price rises within a short-term period.
Penny stocks are therefore great financial options to make potential impressive profits from a small, invested capital.
What are the risks associated with trading penny stocks?
Because there is a lack of reliable publicly available information about penny stocks, it is difficult to analyze a company and its growth prospects to know if it is a good investment opportunity – not to mention that they are vulnerable to investment scams and frauds, as well as pump-and-dump schemes.
Unlike blue chips, penny stocks do not have large trading volume, which means that they are often illiquid and volatile. Illiquid stocks mean that you cannot easily enter and exit the market at the price you’re looking for, and any big buying or selling trading order could make the price move in one direction or another.
This volatility can be an advantage when prices move in your direction, but prices could also move against you and make your investments fall quickly, which is very risky.
Bottom line
Remember that all types of investments involve risk, and penny stocks are no different. You just need to understand and accept these risks if you want to invest in penny stocks to take advantage of cheap stocks and diversify your portfolio with smaller companies. If you decide to go ahead and invest in penny stocks, you will have to look for the right trading platform – one that is fully-featured, popular, and that offers a competitive and safe trading environment
