What exactly are Penny Stocks?
The term “ Penny Stock “ is used by the U.S.Securities and Exchange Commission (SEC) and it stands for security that represents a given financial value. Trading at a very low price Penny Stocks have low market capitalization. Penny Stocks are ideal for beginner investors. Based on a company’s market capitalization, Penny Stocks are also known as Nano-cap stocks, Micro-cap stocks, and Small-cap stocks.
Features of Penny Stocks
- When compared to any other securities, penny stocks have the potential to provide high returns because being issued by small companies, they have the capability of growth.
- Penny stocks can also be risky as market fluctuations have the maximum effect on them.
- In India, Penny Stocks are mostly illiquid.
- Penny Stocks come at a low price and therefore can be bought for a small investment.
- It is hard to tell which penny stock will provide a high return. Thorough research helps to determine which ones are going to be good investments.
Why Should You Invest In Penny Stocks?
- Penny stocks are generally referred to as hit and miss security. The companies issuing them have the potential to grow and provide high returns to investors.
- Since penny stocks are cheaper than other stocks, small investments can be made in penny stocks keeping the rest of the capital for other investments, which eventually reduces risk.
- The low price of penny stocks makes them easily available to small traders.
- No particular certification or degree is required to get started with penny stocks trading. Only a laptop, an internet connection, and a brokerage account are sufficient.
Downsides of Investing in Penny Stocks
- Mostly the companies which are startups issue Penny Stock and hence information such as Past Performance, Growth Prospect, etc are limited.
Hence proper research should be undertaken, before investing in penny stocks.
- Investors should be careful about scams. Companies and scammers purchase penny stocks for high amounts, which increases the value of these stocks, creating hype in the market. This attracts other investors and once they invest in the penny stocks, these companies and scammers sell their high quantity of shares in one go which reduces the stock value and the investors are faced with huge losses.
- Penny stocks are highly volatile as the market can rise and fall very easily.