Stocks are one of the best ways to make money. A stock is a piece of a company, and the investor provides capital. In turn, they get a share of the profits. Penny stocks are one way to invest in the market, but caution is important as they pose many potential issues for the investor.
What are Penny Stocks?
Penny stocks are typically stocks that sell for under $5 per share. According to the experts at Money Morning, “if you’ve been investing for a while, you’ve almost certainly heard about penny stocks.” They are stocks with certain advantages. An investment in a penny stock, while carrying risks, can also pay off in the end.
However, it is important to keep certain things in mind as you examine these stocks, such as the possibility of losing money. It’s best to avoid making these types of stocks a large percentage of your personal portfolio.
Lack of Capital
As you learn to invest in penny stocks, you’ll discover these are stocks that may lack lots of financial backing. Capital is the lifeblood of any business venture. Companies that lack enough funding may find it hard to pay their bills and deal with emergencies.
When a crisis hits, the company may not be able to recover. Large, better-capitalized companies can weather the storm and come out on top. A penny stock company may simply fail. When it does, you can lose your entire investment.
No Real Value
A penny stock may be based on what appears to be a brand new idea. At the same time, the stock may also have issues gaining momentum in the marketplace because the ideas behind it are simply not viable. Not all ideas that are new are good ideas. A concept needs demand behind it in order to succeed.
Many penny stocks are based on fads. These concepts appear to gain a lot of attention quickly. However, a short time later interest falls as demand is sated. Be wary of what appears to be a sure thing. Take the time to investigate further before making any additional commitments.
Large Volumes That Vanish Fast
During the initial flurry of activity, it may seem that penny stocks have a lot of volume behind them. Those who are promoting the stocks may jack up demand to make it look like this is a much larger company. What often happens is this leads to a rise in prices that is ultimately illusory.
Traders are trying to bring attention and demand to this stock. In reality, there is very little demand for the company’s products or goods beyond this small circle. You can get caught up in buying a stock that does not have real volume or real potential in the long run.
Buying penny stocks can pay off under certain circumstances. It is best to be as cautious as possible before you choose this form of investing.