If you are new to trading stocks you may be wondering if penny stocks are worth investing in. With all the hype and possibility, it’s easy to get caught up in thinking you may have found the next big stock that might make you rich quick.
When you’re deciding whether or not a penny stock trading strategy is right for you, it’s important to weigh the risks vs. the rewards. If you are new to penny stocks, there can be a steep learning curve for formulating your own investment strategies for hot penny stock picks.
Here are Some of the Rewards of Trading Penny Stocks:
There are a few reasons why trading penny stocks can be beneficial, especially as a new trader or beginning investor.
Reason #1: Penny stocks are affordable.
Since the average price of a good penny stock on Nasdaq is around $5 a share it is easy to buy multiple shares. In comparison, some blue chip stocks can cost close to $200,000 per share. Needless to say, most new traders don’t have this much cash laying around to invest in their first few stocks.
Reason #2: Penny stocks can yield a much higher percentage gained.
For example, let’s say that you purchase stock XYZ at $1 per share. A few months later the stock explodes to $40 a share following breaking news that a blue chip company has decided to purchase billions of units of company XYZ’s product. If you had purchased 5,000 shares for $5,000 your stock would now be worth $200,000! Contrast this with most blue chip stocks and you will find that since more people and investment firms invest in blue chip stocks there is usually less price movement. I have seen blue chip stocks move less than a percent up and down in one day, week or month for that matter and have seen many penny stocks jump 25% or more in one day.
Reason #3: Penny stocks can get you fast money.
If you have a small beginning balance to start with it might take you 30 years or more to see a large return on investment with blue chip stocks. With penny stocks you can earn just as much in a few days if you play the right stocks at the right time.
Reasons NOT to Buy Penny Stocks
With all of this being said, there are serious drawbacks with penny stocks.
Drawback #1: Most penny stocks never go anywhere.
It is common for penny stock companies to fail. There is a reason they are not trading for a high dollar amount. You will need to be far more diligent in company research when you are investing in penny stocks.
Drawback #2: Penny stocks are far more risky.
Penny stocks can also go from $1 per share to $40 a share then back to $1 a share or worse in a matter of days. This is especially present in penny stock companies that hire paid “pumpers” to promote certain stocks. This is where the phrase “pump and dump” is often used. Paid promoters pump up the stock price with hype then sell it before the price collapses and some poor investor who thought he or she had just purchased the best new stock gets stuck with thousands of shares of worthless stock that never returns to high levels.
Drawback #3: It is difficult to find the next big penny stock.
Every day I look at the stocks that increased the highest percentage that particular day yet I seldom say “Hey I own that stock!” This is because it is hard to see the success of those stocks coming. They seem to come from nowhere, even when doing technical analysis and using candle stick chart patterns to forecast the future stock prices.
Now for the Big Question: Are Penny Stocks Worth It?
Despite all of these shortcomings, I still love penny stocks.
Here are my own personal reasons why I think penny stocks are worth researching and learning about:
- Penny stocks provide a hope for new traders with small start up balances a world of opportunity and possibilities.
- There are techniques that can be developed to increase your chances with penny stocks.
- There are experts in the field and countless sources of information to increase your chances of success with penny stocks.
- Penny stocks are fun to trade because of all the price movement – you are never going to get bored.
- Finally, it is easy to swing trade penny stocks which means that you can hold them for a few weeks or months and make a nice gain of ten to twenty percent and then you can sell it and get out before you take on any unnecessary risk.
Hopefully this will help you understand the risks associated with trading penny stocks so you can make your own informed decision on whether it is the right trading strategy for you. As I will always stress, it is important to assess your own personal financial situation and determine a strategy unique to you. Remember this: Money you are willing to risk and lose entirely is also money you can potentially gain. It is up to you to weigh the risks vs. the reward in deciding if it’s worth spending time and money in pursuing penny stocks.
What do you think? Is it worth investing in penny stocks? Ultimately the decision is up to you. Share your thoughts in the comments below!