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What Are Penny Stocks? A Quick Guide 

About 53% of Americans owned some form of publically traded stock in 2019. Many people invest in the stock market to earn returns on their money and save for retirement. Others buy stocks to play the market aiming to get rich. 

Investing in the stock market is considered one of the best ways to get rich that people are missing out on. But many people don’t buy stocks because of how much it takes to buy stocks in the big companies. So, if you are looking to invest with smaller amounts, penny stocks are a low-cost option you can purchase to begin investing.

So, what are penny stocks, and how can you invest in them? This penny stock guide will outline everything you need to know about investing in penny stocks. 

What Are Penny Stocks?

In the US, penny stocks are defined as common shares in a public company traded for less than five dollars. Although, they are often thought of as stocks traded for less than a dollar. Startupsand small businesses often use them to gain capital and grow their business. 

Buying Penny Stocks 

Since new and smaller companies create these stocks, they often don’t meet requirements to be listed on the big exchanges like the NASDAQ and New York Stock Exchange. Some penny stocks can be purchased on those exchanges, but many have to be bought on the over-the-counter market. So you may have to go through a stockbroker like monexsecurities.com.au to buy penny stocks. 

Are Penny Stocks Worth It? 

It is possible to make money with penny stocks because there is the potential their prices can dramatically increase. The trick is to sort out the good investments from the poor ones. When investing with penny stocks, you’ll want to research the company you want to buy stock in and purchase from companies that have a lot of future potential. 

The Risks of Penny Stocks 

Penny stocks are a highly speculative investment, meaning there is are many risks associated with investing in them. Since penny stocks trade less frequently than stocks from larger companies on the big exchanges, they are less liquid than other assets. Their difficulty in selling means there is a higher chance you could lose money on your investment. 

To make an informed investment decision, you’ll want to know about the company you are buying stock from. But, there is often little historical information about the companies behind penny stocks. So it can be challenging to understand the value of a stock and its potential. 

Since penny stocks have low liquidity, some poor actors will use this to manipulate stock prices.

The pump and dump scheme is a popular scam where investors buy a lot of one stock and hype it up, so other investors buy it. Then they sell their shares before the market realizes that the stock is not worth its high price. As a result, the price drops, leaving outside investors stuck with a lower valued stock.

Invest in Penny Stocks Wisely 

Now that you have an answer to the question of what are penny stocks and understand how they work, you are ready to begin investing in them. Penny stocks provide an opportunity to make money, but keep in mind that they are risky. Always research the penny stock companies you want to invest in to avoid a bad investment or fraudulent penny stock. 

Did you find this penny stock guide helpful? Check out more investment and finance articles on our website.