The Pros and Cons of Investing in Penny Stocks

Penny stocks or cent stocks are typically defined as shares of a public company that are usually traded for less than $5 a share. Wise investors know that penny stocks are a high risk, but have the potential for a big return. While most financial advisors recommend that people don’t invest in penny stocks, it might be wise to incorporate penny stocks into your overall portfolio. However it is important to know the pros and cons of investing in penny stocks before you invest your first dollar, or two.

Pros of Penny Stocks:

High growth rate potential:

Once of the biggest reasons that investors like to invest in penny stocks is because they have a very high growth rate potential. For instance, if you invest a lot of money and acquire a lot of cent stock, if that company suddenly grows or the stock rises significantly, you can stand to make a huge amount of money.

Diversify with very little money:

Penny stocks are also great for first time investors because they have the potential to set their budget and invest in a number of different companies for very little money. This is a great way to get a feel of the market place and how the stock market works. If you find that penny stocks work for you, as a new investor, you might want to diversify and try your hand in other types of stocks as well.

Cons of Penny Stocks:

Extremely unstable:

One of the biggest disadvantages of penny stocks is that they are extremely unstable. One day you can buy your stocks at a very low price and the next day its high, but the day after that it can dip again. Due to the risk involved it is difficult to make a significant return unless you play with the right chips. Penny stocks are inherently a dangerous gamble and it is possible to lose a lot of money.

Susceptible to shady investment practices:

Penny stocks are also susceptible to legal, but shady investment practices where traders will buy a lot of trades in a company just to make its numbers rise. If you hold a lot of penny stock, you might be duped into thinking the market is on an upswing, when it’s really just a bunch of day traders bending the rules in their favor.

Conclusion:

At the end of the day, financial analysts say that you shouldn’t stay away from penny stocks all together. There is a potential to make a lot of money, but you have to play your cards right. And not putting your cards on the table could make you lose more than if you hadn’t started playing to begin with. In general, you should always do research on the company you’re investing in. Out of all the penny stock tips, doing your due diligence is the best way to gain an advantage and make investing in penny stocks work for you. While penny stocks are a dangerous gamble, investing in them will greatly increase your feel for the stock market, giving you an invaluable intuition to be smart with your money, and increase your odds of making a large return.