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Should you Invest in Penny Stocks?

Learn the basics and risks of investing in penny stocks market

If you are someone who is looking to invest some of their money in a certain financial market, you have probably heard of penny stocks as one of the most intriguing investment options. Depending on where you read about them and who you heard from, you might be more or less interested in trying your hand at the penny stock market. Today, we will give you some facts that you can then use to determine whether penny stocks are for you and whether you should invest in them.

Learn about penny stocks before you invest
As with any type of investment, get some facts about penny stock market before you decide
if this is a type of investment you want to pursue.

Penny Stocks Basics

As their name would suggest, penny stocks are stocks that are much cheaper than stocks traded on the more traditional stock markets. They can cost anywhere from a few cents per stock to $5 per stock. They are mostly traded on the over the counter markets, such as the OTCQX, OTCQB and OTC Pink. Penny stocks are usually issued by smaller companies which have just started out or which might have had some troubles in the past.

Penny Stocks Risks

The penny stock market is considered to be a high-risk market, meaning that the fluctuations are much more common and volatile than in the more traditional stock markets. There are a few reasons for this.

The first reason is that the rules that govern this particular market are much more relaxed than those governing other markets. The SEC and FINRA regulations, for instance, are not anywhere near as strict as those applied to more traditional markets.

Another reason is that the market is not as liquid as some other markets, meaning that it can sometimes be difficult to purchase or sell one's penny stocks. Because of this, you can end up owning a lot of penny stocks of a failing company that you simply cannot sell to cut your losses.

Furthermore, penny stocks are more prone to certain practices that are quite rare in traditional markets, such as the pump and dump schemes. With these schemes, people with a lot of clout purchase penny stocks of a certain company and then promote them falsely to increase their value. Once the stocks reach a certain value, they dump their stocks which plummet in value after that.

Allure of Penny Stocks

The other side of the penny stocks coin is just bright enough for many people to get in on the action and try to make money in this market. While it can be difficult, this is something that can definitely be accomplished with smart strategies and some savvy moves. Perhaps the most famous example of this is Tim Sykes who made millions by trading penny stocks and who shares his insights in this guide.

The reason why penny stocks are so alluring is that the inherent volatility of the market also entails great possibilities for significant profits over much shorter periods of time. Namely, with good research, one can discover promising penny stocks that can increase in value greatly in no time. In order to be able to identify such penny stocks, it is recommended that the investor has knowledge of a certain field or industry.

Penny stocks are also attractive because they require significantly less investment in order to trade lucratively. The amount of money you will need to beef up your penny stocks portfolio is much smaller than what you would require to seriously invest in more traditional financial markets.

Always be Careful

In case you are aware of the risks and you decide that the penny stock market is for you, we urge you to be careful. Do your homework, find the people you trust and make sure you are always staying in the loop, with your ears to the ground. Play your cards right and you might just become a successful and high-earning penny stocks trader.

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"Money is not an invention of the State. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the State."

Carl Menger - the founder of the Austrian school of economics