Are Penny Stocks The Right Investment For You?
Penny Stocks aren’t the safest bet in the market and certainly aren’t the most liquid stocks to choose from in many cases. But the newbie investor may gravitate to penny stocks because it costs much less to buy many more shares than compared to some of the larger cap stocks in the market. Also for the inexpensiveness of these penny stocks, the potential for capitalizing on small moves could equate to rapid & large gains. You could literally double your money if a one cent stock improves to two cents…it’s simple math.
But are penny stocks something that you should consider adding to your portfolio? It all depends on your own risk tolerance. Technically speaking, penny stocks fail to meet certain, strict requirements to be listed on a major exchange like the New York Stock Exchange or the NASDAQ. Those requirements include the share price but also have certain financial standards as well.
You can’t lump all penny stocks into a single generalization, however, you can pay attention to the potential risk versus reward that is in play during market hours. Share price can increase and decrease within the blink of an eye and not only might this have something to do with the market in general but also with what the underlying companies are doing/or not doing.
The company behind a penny stock can be very risky on its own. Many lack financial backing and assets overall in order to progress with their operations. This can create a very risky situation for fundamental investors and when compared to other organizations, many penny stocks may fall under what is known as smaller market capitalization or even micro market caps. These are tiny compared to the likes of larger companies like Apple and Amazon. But don’t stress because knowing what to look for can help you determine the proper way to address many kinds of penny stocks.
This includes trading based on technical chart patterns or trading based on corporate events. You have to research to find any good stock as there are plenty of stocks trading under certain price points and could truly be considered undervalued stocks. Ask yourself these questions to get started:
- Why is the stock’s price so low?
- Is the company in bad or good standing, financially?
- What are the chances that it will end up succeeding in their field?
- Was the company’s stock higher and if/when it was, how active was the market?
- What kind of buzz is circulating around the stock?
These are just a few questions to have answers to before you decide if a certain penny stock is right for you.