Are penny stocks fraught with peril, replete with investments in nonsense, and staffed by con artists driving expensive cars? The correct response is "Yes." Or are gems in the rough to be found in penny stocks? Are they young businesses just getting off the ground, which may have been passed over or underestimated by investors, but which have the potential to multiply a modest amount of money into a substantial sum in a relatively short time? Once again, "Yes" is the correct response.
You may have heard stories of elderly widows stealing their life savings from them by con artists. It's possible that you knew someone (or that someone might have been you) who made the mistake of investing in a high-risk company because the narrative behind it seemed intriguing, but those shares are now worthless.
Every narrative may be told from two perspectives. You may have heard stories of a single penny stock selling at more than $10 a share. After all, most of America's most successful businesses were once humble beginnings, and those who saw opportunities early on were rewarded with financial success. Perhaps all the stories of being wealthy quickly drew your attention, or perhaps the pictures of flashy automobiles and large mansions did it.
Despite all the dangers, the prospect of lucrative returns seems sufficient to entice millions of optimistic investors to purchase these bargain-priced shares (for better or worse). In any case, it is essential to have a solid understanding of the benefits and drawbacks associated with penny stocks.
Pros
Those Who Will Come Out on Top in the Future
There are a lot of fantastic firms that are now selling for pennies. They may have tried-and-true executives and teams, stable financial situations and ratios improving, a rising market share, and innovative goods or services poised to dominate a certain sector.
The Jubilation of the Search
You have experienced the exhilaration of the enormous profits of investing in penny stocks if you have ever made 5% on an investment in one year. This endeavor is not for those who lack courage. However, investing in penny stocks might seem more like a thrill ride for individuals who like gambling than anything else.
Making a Limited Spending Plan Count for Considerably More
Most people invest in penny stocks with quite modest sums of money. If an investor has $500 to invest, they may only be able to purchase three or four shares of a larger firm. Using the same amount of money, one might buy thousands of shares of penny stocks. Therefore, why not try to obtain more value for your money?
The Lightning-Fast Pace of Gains
However, not all penny stocks see rapid price movement in the market. Those that do, however, tend to make their significant price changes within days rather than years.
Cons
Stocks of a Poor Quality
Corporations issue the majority of penny stocks with poor reputations. This may be due, in certain situations, to the fact that their financial situation and balance sheet are in disarray and that their activities result in significant losses. It's possible that the industry they operate in is on its last legs or the market is just oversaturated with too many rivals.
Major Losses
Most investors who "try their hand" at the penny stock game end up with less money than they started with, a depressing reality that cannot be avoided.
Risky Markets
Some penny stocks trade on major exchanges like the New York Stock Exchange and the NASDAQ. All underlying corporations have established guidelines for how stocks should be listed and reported, and investors are held to specific expectations.
However, most low-priced shares are traded on the Pink Sheets, OTC, or OTCQX, markets with minimal listing costs, reporting requirements, and other trading requirements and regulations. These unregulated markets are not even stock exchanges, and they draw thousands of low-quality enterprises due to their lack of regulation.
Astonishingly Low Prices
We have seen irrational pricing with every penny stock in the public spotlight, discussed in the media, or said to be in the works by the rumor mill. Any investor rush may drive the price of the shares to insanely high levels since it does not take much purchasing to drive up the price of penny stocks, which means that any investor stampede can accomplish it.
