Often being the go-to for many investors looking to make a quick buck off of day trading, Penny stocks are known for their rapid-growth and unpredictability. While there is no official direct definition of a penny stock, it is stated to be any stock that trades on the market for under 5 dollars. Although they promise exceptional returns, penny stocks come with a level of risk that’s almost unprecedented in the market. With schemes on almost every corner, it is very important to be very well educated in your decisions before deciding to venture into penny stocks.
That being said, Here are the pros and cons of investing in penny stocks.
This is undoubtedly the most attractive feature about penny stocks, small price movements can be enough skyrocket your investment. Only one day could be enough to double or even triple its worth, a gain that doesn’t come with a hefty price tag. You can also lose half your investment in a day; the risk and return go hand in hand and should not ultimately be the only thing you look for in penny stocks.
• Diversify your portfolio during the short term
Traditionally being more of a short-term investment, penny stocks can be very useful for diversifying your portfolio. Timing is key here, knowing when to walk away will ultimately be the basis of the outcome of your investments. These liquid investments can be very useful in leveraging your long-term investments, but you need to make sure that you limit your holdings to no more than 5-10% of your portfolio dependent on how risk averse you are.
• Information bias
Whether the penny stocks are traded on the OTC Pink or Bulletin markets, the information you will be able to find about the stocks will be limited. The only way to pass through this is by being the judge of all the information released about the company, because at the end of the day, every penny stock claims they are the next big thing and success story but the underlying company will need to prove this to be true.
The main caveat of any penny stock, is the volatility in the price movements that are faced throughout the life-time of the stock in your portfolio. The fact of the matter here is that there are more losers than winners in the penny stock markets, the key to which side your on resides in the amount of care and research you put into the penny stocks in your portfolio.