Penny stocks are also known as microcap stocks and are small company stocks that sell at low share prices. Most people consider true penny stocks to have share prices below $1, while some others might consider stocks up to $5 are still penny stocks. Anyhow, new investors should do their homework carefully before investing in this market.
1. The risk and the reward.
Penny stock market is full of risk and reward. Because the share prices are very low, just a small change in share value could result in huge swings in investment value. For example, if you bought a penny stock that costs10 cents each share and it increased by one cent, then your investment value increased by 10 percent. The same scenario can also happen when you lose your investment. Another risk of penny stocks is that these small companies usually have few proven track record and are more likely to fail than those large companies such as CocaCola and Walmart. U.S. SEC suggests that investors in penny stock should get prepared for probability that they might lose their whole investment.
2. Do your homework and collect the company’s information.
Before you decide to invest in a penny stock, you need to do some research and collect information of the company, even when you are investing with large and well-established companies. Large companies often publish and make their stock and financial information available to the public and the shareholders. According to SEC, one of the biggest differences between a penny stock and other stocks is the amount of reliable and publicly available information about the company. It will be more difficult to gather information on a penny stock company and you should not invest in a company if you can’t understand how it brings value to the market. You need to know that due to the less available information about the stocks, penny stocks are particularly vulnerable to fraud. Some unscrupulous people might use mass email and phone spamming as well as Internet advertising to attract traders to fraudulent investment opportunities, usually touting guaranteed returns and huge profits.
3. Start with small investment and diversify your investment.
If you choose to invest in penny stocks, you can start with a small investment and diversify your investment. Try to avoid putting a large portion of your overall assets into the penny stock market. A good way to mitigate risk in investment is to spread out the investments across a broad spectrum from penny stocks to normal stocks, mutual funds, bonds, as well as other low-risk financial accounts like certificate of deposits, high-interest saving accounts and money market accounts.
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