Sometimes known as micro-caps, nano-caps, small cap, or OTCs, penny stocks are securities of small private companies, often with less than a penny per share, that generally trade at low prices. They may be purchased and held for short periods and then delisted by the market where they’re listed, and then traded in again. Some penny stocks are overvalued, while others are undervalued.
Many investors, when considering purchasing penny stocks for their portfolios, view them as being high-risk investments. While many of these stocks are probably a good bet, the risk inherent in investing in such small quantities can lead to some spectacular profits and losses. Although you can certainly make money on penny stocks — if you do your homework and understand the dynamics of the business — many investors have lost large sums of money because of poor stock selections.
When selecting penny stocks for investment purposes, it’s important to remember that there is very little regulation in the penny stock industry, which means that there are often many unscrupulous operators that don’t play by the rules. It’s essential to be aware of these risks and to be armed with sound knowledge of the market.
If you’re looking to get started in investing in penny stocks, there are several ways you can go about doing this. One is to purchase an index fund that invests in a variety of different companies. Since these stocks are generally priced so much lower than the companies that make up the index, they’re often attractive to investors because they’re inexpensive.
Another way to invest in these types of stocks is to purchase them through your broker. Brokers generally own several different stocks in different companies and may often purchase them in bulk for a discount. By making your purchases through a broker, you’ve taken care of the investment part — it’s your broker who will handle all the paperwork. Your broker will help you decide which of your holdings are high-yielding and which are risky.
One other approach is to get involved with an exchange-traded fund (ETF), which invests in penny stocks but is typically managed by professional traders and banks. Because this type of fund allows you to diversify, you don’t have to worry about losing money on only a few companies. With ETF funds, your broker can purchase small cap stocks several times and sell them several times during a single day.
Just keep in mind that the risk associated with investing in penny stocks is similar to that of other stocks, if not greater, in certain cases. However, if you do your due diligence, you’ll find the potential rewards are considerable.