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Penny Stocks: Is it Worth Getting Into?
Penny stocks, well popularized by the Hollywood movie “The Wolf of Wall Street”, have a negative connotation for many people. The common belief shared by those people is that investing in penny stocks is shady, unethical, or even that it is a fraudulent get-rich-quick scheme.
On the other hand, despite those claims, there are many people who believe penny stocks hold enormous value for investors, and that they are a great way to grow your wealth.
A common person, wanting to know more about penny stocks and whether it is objectively worth getting into them will often be left to choose between plain black or plain white.
In this article, we are going to discuss the potential upsides and the downsides of investing in penny stocks, and whether they are actually worth getting into.
What are penny stocks?
A penny stock is defined as a stock, with a trading price of less than $5. Oftentimes, they are stocks of small companies with little revenue that are deemed to have little potential. For that reason, most people do not even pay attention to penny stocks and do not consider them as worthy investments.
Why invest in penny stocks?
While it is true that most penny stocks tend to go bankrupt within a short period of time, that is far from certain. To illustrate this point, let’s take a look at Apple Inc. (AAPL) which is, at the time of writing, trading at $134 per share. But did you know that back in 1997, Apple was actually a penny stock, trading at just $0.12 per share? Had you invested in Apple back in 1997, you would have multiplied your initial investment by a factor of more than 1,000. That is, you would have turned a $1,000 investment into $1,000,000.
Apple is a prime example of why it pays off to invest in penny stocks, however, it is, by no means, the only one. There are plenty of penny stocks which, contrary to the prevailing common belief about them, skyrocket in value and show tremendous growth potential.
This is the reason why investing in penny stocks can also bring rather quick returns for those with a good eye for picking winners. If you are able to spot the potential in the penny stock that most others have overlooked, you are bound to grow your wealth significantly faster than most people.
The pitfalls of investing in penny stocks
Investing in penny stocks involves taking on the small probability of unlimited upside, with a high probability of a limited downside. In other words, you can make a lot, fast while taking on relatively small amounts of risk, multiple times, and spreading it out throughout multiple investments. While this can work wonders if you have a good eye for spotting winners, it can backfire if you keep missing over and over again with no luck.
For this reason, investing in penny stocks can be a very volatile experience, where you may have to keep losing until you find a few winners that will make your investments worthwhile. The good news is that your losses are limited to your investment, while the upside is not.
Another important aspect of investing in penny stocks is its low volume and market capitalization which means they are less liquid than your typical shares, and also are more prone to market manipulation. This is important for two reasons. First, low liquidity means higher spreads which can translate into higher costs when purchasing penny stocks. Second, due to the low market capitalization, penny stocks can be easily manipulated by larger players and are often targets of pump and dump schemes, whereby interested parties pump up the stock price to induce more buying, just to sell their holdings afterwards at higher prices which brings the stock down and leaves its victims with significant losses.
Is it worth getting into?
Investing in penny stocks is a peculiar way to grow your wealth which holds both tremendous upside and significant downside risks if you are not careful or do not know what you are doing. It is not your traditional way of investing and requires a lot of expertise and experience. However, if you are able to master the field and accumulate enough knowledge and experience, it can be one of the fastest ways towards great success and financial freedom.
Starting your penny stock investing journey on your own can be rather difficult at first. It is wise to start slow by taking a look at some great penny stock guides and learn before you actually invest any money into them. It is also important to understand that the obscurity of the penny stock industry makes it so that it is probably best done with the help of a mentor. Due to the lack of available knowledge base on penny stocks available online, finding someone who has such expertise and learning from him/her is one of the best ways to improve.
This article does not necessarily reflect the opinions of the editors or the management of EconoTimes