What Are Penny Stocks? Benefits and Downfalls
While they’re typically known as penny stocks, this category of investment includes stocks that are under £3.50 ($5) per share. Despite being a low-cost option that can seem appealing at first, they can be quite risky to invest in and are often considered a less-than-ideal choice for beginners.
As such, it’s important for anyone considering investing in penny stocks to understand what they are. Additionally, it might be worthwhile to learn what they offer and the potential downsides that can come with trading them. Luckily for you, we’ve taken the time to compile everything you need to know about penny stocks.
What Are Penny Stocks?
Before we get into anything else, let’s quickly get a better understanding of what a penny stock is. In general, the name refers to small companies that are open to investment, but trade for under £3.50. Lower prices may seem like a potential benefit at first, but this can also come with some serious downsides. For example, lower prices and infrequent trading reduces the liquidity of penny stocks, making it harder for investors to sell. While there can be some profit margins to be made, the risk of losing significant amounts of your investment is just as likely. If you’re considering starting small and using these to build your confidence before moving onto larger stock options, be prepared for the fact that they are considered low input, high risk.What Are the Benefits of Penny Stocks?
Despite the fact that these types of investments aren’t ideal for everyone, they can offer certain advantages, such as:- You don’t need significant collateral to get started. The fact that penny stocks can be purchased for next to nothing makes them a more accessible option for traders with smaller. accounts (or perhaps those who want to put less into an investment and see how it goes)
- You could profit whether stocks are up or down. Interestingly, whether the stocks increase or decrease, you could still make a profit. Often, this is by selling short when penny stocks fail, which is essentially the opposite of a traditional stock investment.
- Research often pays off. Finding the right company to invest in can be quite tricky, especially since there are quite a few frauds out there hoping to make a quick buck. On the plus side, if you take the time to research your options, you could get a better idea of which companies are the most promising.
- Getting into penny stocks is simple. One more reason why they’re appealing to beginners is that they’re easy to get into, especially with stock brokers uk. As long as you have an internet connection and a brokerage account, you can kick off a transaction.
The Downsides
Of course, since penny stocks are known to have their flaws, it can be important to have a better understanding of where they fall short. After all, knowing how things can go wrong could help you to avoid mistakes and potential losses when trading. Here are a few of the disadvantages you should consider:- Low price doesn’t equal low risk. Many of those who want to get started in trading assume that lower costs lead to lower risks. Unfortunately, this isn’t always the case. Penny stocks, in particular, tend to have higher risks than those that trade on major exchanges.
- The prices of penny stocks can be volatile. Small price tags can alter the assumed value and the way that the entire market operates in comparison to its larger counterparts. For example, small changes in stock prices could equate to large percentage gains. On the other hand, this can also prove to be true for losses, which is something you need to consider.
- They’re harder to trade. With larger assets, you’ll often find that the market has many motivated investors with who you could trade at any given time. A key issue that investors find with penny stocks is that trading volumes tend to be considerably lower, with less people willing to part with their cash.
- Investing in lesser-known companies presents a risk. One of the riskiest parts of penny stocks is that you’ll often be investing in a small company without much of a track record. You’ll either have to go for a blind investment or spend your time doing some considerable research on a small company to ensure that you’re not making a mistake.
- Penny stocks don’t have the best reputation. One of the main reasons why there are fewer people investing in penny stocks is because of the reputation doing so has earned over the years. While offering great potential, it’s also known for volatility and fraud, which understandably turns a lot of traders away.
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