Investing in the stock markets has historically been one of the best ways to increase wealth. Despite all the market crashes and worldwide economic and financial crises, the stock market has continued to gain in value over time, providing great opportunities for investors to make profits.
Today, penny stocks are becoming increasingly popular trading vehicles for those looking for ways to invest with small trading capital to potentially make a lot of money. Penny stocks are companies with a market capitalization of less than $250 or $300 million. While penny stocks are mostly traded in the “over-the-counter” or OTC market, some penny stocks are traded on major regulated exchanges. So, are penny stocks a good investment opportunity for you? Let’s dive right in to better understand how to play penny stocks.
First, you need to determine your trading style
Before even considering adding penny stocks to your portfolio, you need to determine the kind of trader/investor you are and what your financial goals are, as different goals will require using different strategy and investment vehicles. To better shape your trading plan, take into account your financial situation, your personality, your risk-tolerance, your goals, your investment horizon, as well as the time you can dedicate to your investments.
Then, you need to have a look at the advantages of trading penny stocks
One of the biggest advantages of penny stocks is that they can provide large profits from small invested capital if properly traded, as they are worth less than $5 per share. Having such a small price per share means that they are more affordable than bigger companies like blue chips, especially for investors with a limited budget. It is also easy to get started trading penny stocks.
Penny stocks are also volatile assets that can provide great profit opportunities in a short time-frame. With good money and risk management, penny stock traders can exploit the volatility in this market to their advantage, especially if they have a short-term active trading strategy.
Finally, you need to understand the risks of trading penny stocks
To decide if you should use an asset in your financial strategy, you need to understand the risks involved to determine if they fit your risk-tolerance. While penny stocks can provide great opportunities, they’re rather risky financial products.
Firstly, penny stocks are small companies without a lot of publicly reliable information available, which sometimes makes it difficult to really understand the business model, their management, or the growth prospects of these companies. It also means that it is easier to manipulate their stock price, or to come across a scam.
Secondly, penny stocks are not like other stocks – they are not stable, well-known, or established companies. They are also usually not regulated stocks traded on big exchanges like the NYSE, they’re traded over-the-counter (OTC).
Finally, penny stocks are volatile, which means that their price changes can be big and happen suddenly. Microcap stocks are also traded with low-volume. It might therefore be difficult for you to sell your stocks at the right price when you want to. It also means that a single trade can significantly impact stock prices.
So, are penny stocks a good investment opportunity?
Penny stocks represent companies that will most likely fail. However, it doesn’t mean that they do not represent good investment opportunities. They can indeed experience impressive spikes before they fail. You can gain from this volatility with the right trading style, the right mindset, and a sound trading plan. If you do your homework and wisely research trendy penny stocks with significant growth prospects, you might even be able to find tomorrow’s big success, and potentially make a lot of money with small initial capital.
