Penny stocks are stocks with a value of less than 5 USD. They are usually used for high-profit trades. Most of these stocks belong to companies that do not have much reputation in the stock market, which means that trading in these stocks has a high risk for the investor.
Beginner investors are often attracted to penny stocks because they think they can make a lot of money this way. Most of them think that if their share increases from $0.10 to $0.20, my money will double, so I can make a big profit with a small investment. This is a common perception of this group of investors. But what exactly is a penny stock? We will continue to explain this and explain how we can grow in penny stocks with a realistic look.
What is a Penny Stock?
A penny stock is a stock that is worth less than $1 per share. Buying these stocks is more dangerous than buying stocks of large and reputable companies. Penny stocks include stocks of bankrupt companies, some scams, and conspiracy theories to transfer greedy novice money to other operators.
Penny stock history:
Before electronic exchanges and the creation of discount brokerage firms, penny stocks were prohibitively expensive. In the old days, you paid about $0.25 to buy and sell a stock.
This commission was a brokerage firm. Given that it was a fixed amount, it did not matter whether a stock was trading at $1 or $100. In any case, the commission accounted for a large portion of the investment in penny stocks rather than more valuable stocks.
A number of mutual funds have implemented policies to prevent shares under $5 from being traded because of cost or because of their dubious nature. Over time, people shunned penny stocks, and it was assumed that only companies in poor condition would allow their stocks to be exchanged for pennies.
Penny Stocks Today, the accepted definition of penny stocks is to some extent extended to other higher-priced stocks in OTC markets.
Should I buy penny stocks?
OTCs generally have less liquidity, so being on the list requires fewer requirements. Many of these companies do not submit financial statements even on time and are often managed by ordinary people.
In general, it is always recommended to avoid this type of stock. Of course, there are legitimate companies that have low stock prices. AMD electronics company used in laptops and mobile phones, for example, has long been traded for less than $5 per share. Or Swiss health insurance company Roche is listed on the OTC market for American investors to access.
These two are law-abiding companies and provide financial reports on time. They are clearly not illegal and have only one characteristic of most penny stocks, which is the low price per share.
Many penny stocks and over-the-counter companies are nothing more than sham companies and involve liaison with undercover companies that do not report financially once a year.
A large number (perhaps about 40%) of OTC shares are gray market shares or some kind of OTC stock that are legal but unofficial and unlicensed. Can you imagine your money being invested in a place where you do not know the income or even the business model is not clear? This is the same concern for half of the OTC stocks.
Although it may seem like a simple and quick way to make a profit, know that penny stocks are anything but a quick way to make a profit. The simple way to get rich from the stock market is to buy shares of good companies and have them for a very, very long time, maybe even a decade. I recommend penny stocks only to people who have little capital to start. If you also decide to buy penny stocks, remember the points I will make in the next section.
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How to invest in penny stocks?
As we explained in the previous sections, penny stocks are free-market companies with a stock price of less than $5 and a market capitalization of less than $200 million. They are sometimes referred to as “securities market robbers” because of the risks associated with them. However, for penny stocks, if you follow these steps, you can have a good position in an experienced and advanced investor portfolio.
• Remember that this investment is as risky as larger stocks. Therefore, have enough savings to help you earn at least three months if the capital fails.
• Understand why penny stocks are considered a risky investment. Penny stocks are one of the most volatile and manipulated types of stock exchanges. Companies do not normally have the good financial performance of the past. In addition, stocks are often manipulated by tricks.
• First, experience secondary and major stocks for at least one year. During this time, you should familiarize yourself with reading your balance sheet, income statement, and cash flow statement.
• Find out about specific aspects of penny stocks that they find potentially profitable and risky for your shopping cart. Understand the mechanics of cash flow, market investment, and stock structure. Also, understand the purpose of a state-owned company that fraud and loss of investment may occur in penny stocks.
• Look for “red flags”, common features of companies that have fake goals or were created solely to make money through low capital.
• Look for companies that are constantly generating cash and increasing their free cash flow over time. Avoid companies that have a lot of debt.
• Instead of the share price, compare the price of each share with the book value per share (fixed assets minus debt).
• Buy companies with very little cash flow (ideally less than six times).
• Limit any investment in a small stock to a maximum of 5% of your portfolio.
I do not recommend penny stocks to everyone because it is not suitable for everyone. This investment requires that you have a certain amount of risk tolerance as well as the ability to react quickly in uncertain situations. However, if you think you have the ability to trade pennies, you need to learn how to deal with money management techniques so that you can skillfully maintain your capital and succeed in this business.
“If you have any feedback about how to invest in penny stocks that you have tried out or any questions about the ones that I have recommended, please leave your comments below!”
NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.