Penny stocks are usually classified as stocks that sell for under $5.00. Other definitions for penny stocks are shares selling for under $3.00 per share, under $1.00 per share, or shares of companies with a market cap of under $200 million. Penny stocks can be very risky investments, but there is a place for these stocks in the portfolio of a savvy investor. There are some steps to take to lessen the risk and potentially increase the reward.
Penny Stocks are Speculative Investments
Penny stocks should always be considered a speculative investment. They are risky and this high risk makes them a vulnerable portion of any portfolio. A smart investor will never put more money in penny stocks than they can afford to lose. The companies are often new and have no track record, or they are companies that have fallen on hard times and are attempting to recover and bounce back to profitability. They usually lack the strong fundamentals that investors look for when purchasing shares. The stock market is sometimes considered gambling, and penny stocks are the slot machines of stock investing.
What to Know Before Trading Penny Stocks
Before trading penny stocks it is best to have some experience with larger stocks. Understanding how stocks trade, how to read stock prices, and how to properly trade them in an account is vital before trading low-priced stocks. Knowing how to understand a company’s financial statements is also important. Learning how to read a balance sheet, and income statement, and other important financial information on a publicly traded company is essential to making money in stocks.
The penny stock world is filled with promoters and scammers. The Internet is replete with stock gurus and web sites that appear to be legitimate stock advisors disseminating unbiased stock advice. However, many of these experts are merely promoting a stock for the purpose of raising the price for a short time so they can dump their stock at a profit. As soon as they sell their shares, the price plummets and those who have followed the advice are stuck with stocks which have very little chance of rising in the future. If obtaining picks from an expert is the method of choice, doing proper due diligence on that expert first is essential to the health of any stock portfolio.
There are a few other things to know when buying penny stocks. Penny stocks that trade on the major U.S. exchanges are safer, though there are still good stocks on the over-the-counter (OTC) market and foreign exchanges. Stocks with under $5 million in revenue are very risky. Companies with heavy debt have too much risk and should be avoided. When seeking good potential stocks for a portfolio, comparing share price with book value per share may offer a good way to see if a stock is truly undervalued and a prospect for purchase.
Penny stocks are a very popular investment vehicle in today’s market. For a small investment, it is possible to make very large gains. However, penny stocks are a risky investment that take research, effort and time. Always limit investment in penny stocks to a small portion of any portfolio to limit losses. Even with all the potential hazards, penny stocks offer the disciplined and intelligent investor the chance to make big bucks without too much risk.
Fred Phillips - I am a small business owner, husband and father. My business does court research, business verifications, asset verifications, and more. I ...
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