What are penny stocks?
Although many people think of penny stocks as stocks that sell for pennies, this is not the case. Penny stocks are categorized as stocks that sell for under $5 per share.
Penny stocks are offered either by startups who are in the developmental stages or companies that only have one or two products. Sometimes, these companies grow to become some of the most successful businesses on the market. However, the majority of these companies collapse before reaching maturity. In this article, we are going to explore How to Trade Penny Stocks for Beginners (in 2019).
The risks involved
As the name suggests, companies that sell penny stocks usually have a low value. This means that you will be investing in companies that have less potential for growth. As a result, you are not likely to get a lot of profit in the long run. The low values of the companies are normally as a result of inferior products. This causes the companies to make loses which lowers the overall standing of their businesses.
The other risk associated with penny stocks is the low level of regulation. This means that, unlike conventional stock markets that are highly regulated, penny stocks are less regulated. As a result, the stocks are not held to the same standard and thus, there is room for unscrupulous traders. This sometimes disadvantages investors as they do not have anywhere to get redress should anything go wrong.
For these reasons, there is overblown information on penny stocks which causes people to make the wrong decisions on stock investment. These are the same reasons why penny stocks are considered very volatile on the market. However, it is important to note that the same risks can present opportunities to other investors on the market.
Why you should consider investing in penny stocks
After reading the above, you may be wondering why it is worth investing in penny stocks. Although the investment is filled with risks and shortcomings, there are a few reasons why it might be worth investing in these kinds of stocks. The reasons are below:
You do not need a lot of money
The first reason why you should consider trading on penny stocks is when you have a small amount of money. Since penny stocks are priced low, they are accessible to those with little amount of money. This brings in students and low income people to try their luck on the stocks.
Easy to enter
Unlike other forms of conventional stocks, it is very easy to enter into penny stock trading. You do not need special certifications or degree. To engage in penny stock trading, you just need a computer, laptop and a brokerage account. With that, you will be able to trade on penny stocks for as much as you want.
You can get rewarded
Lack of proper regulation can make it difficult to tell which stocks are doing well from the ones that aren’t. This can be a big risk in penny stocks but to those who are sharp at trading on these stocks, it can be a big advantage. If you become disciplined and do a lot of research on these companies, you can get rewarded for your efforts. You should run a background check as well as product evaluation to find the standing of these companies. This is to help determine whether it’s a good investment or not.
Profits can move up or down
With penny stock trading, you can potentially benefit as the stock is moving up or down. This means that unlike in conventional markets where you buy stock and wait for it to move up, you can sell even when the stock for a given company is going down. This process is known as short selling. In this method, you are buying stock hoping that it will depreciate in value.
It is hard to guarantee whether one will make money on penny stock trading or not. This is because it is almost impossible to predict what will happen in the market. This is especially because only a few traders gather the necessary skills to engage in the trade. With the right skills, you could at least either make more informed decisions or be able to cut down on your losses.
To be a professional penny stock trader, you have to learn the skills first. This includes the rules, the basics of trading, how to predict patterns and how the market works. The trader must also be very disciplined and tactful in order to be successful on penny stock trading. Furthermore, before you start trading on huge amount of money, you have to do some trial and error with small amounts of money. This is to minimize your losses even as you start engaging in penny stocks. The bottom line is that it is possible to make money through penny stock trading. However, you have to pay the price first through research, trial and error, and losses here and there.
Trading on penny stocks is not for the soft hearted. The process requires a lot of patience and strong discipline so that you can learn how to trade. However, those who are willing to stick to it have a lot in store for them. In addition, there are plenty of benefits for trading on penny stocks.
As we have seen above, penny stocks are not the only trade with pros and cons. However, it is a risky type of investment where more people stand to lose. Although penny stocks are sold at a very low price to enable small companies access funding, the stock lack a liquid market, and proper information on the trading company and have a high potential for fraud. If you still think that it is a worthy investment for you, you need to be fully aware of what you are getting yourself into. But if you are a beginner investor, take time to learn about penny stocks first before making it part of your investment portfolio. It is only by doing that that you will caution yourself from making huge losses.