Should You Buy Penny Stocks?

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Should You Buy Penny Stocks?

Penny stocks are usually stocks traded over the counter with very low prices, usually less than $5 or even below $1. Stocks with such low prices allow investors to hold thousands of shares with very small amount of money. This is one of the strong attractions of penny stocks. Investors with small amounts of capital can buy large volumes of shares at low prices, and thus see a profit if the shares show large price movements.

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But, don’t celebrate too soon. Some people do make money by trading penny stock, but it is a risky game because the reverse is same and you may lose all your money. Penny stocks are generally considered highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. It might be a very small company, not worth very much money. It might have wild swings in its stock price. It might be a risky company in a very risky business. It might have loads of debt or huge tax liabilities.

With all of the potential risk, should you buy stocks? I would say that if you were a person with high tolerance for risk, then yes. The desire for a great stock deal usually leads investors to choose penny stocks. People think that a stock with price under $5 per share has lots of space to grow and it won’t take much movement in the stock’s price to make a lot of money. Also, with such low price, you surely have more options. That is right, but the bottom line is that you need to choose the right stocks. With the right stocks and companies that run profitable businesses with the potential for growth, it is possible to double your money in a short term.

You should do a very careful research on the stock before you make an investment decision. Also, you should be prepared with the possibility of losing a huge percentage of your investment. Remember, returns always accompany with risks.

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