Penny stocks are an investment fraught with risks that have the potential to bring unexpectedly high returns. Putting your money in these stocks requires complete knowledge and a lot of courage too. But is the inherent risk of failure worth the dollars and the time you are willing to invest?
Penny stocks are not a waste of time because you can make money as a broker, floater, seller, and penny stock buyer. Knowledge is a prerequisite of making money in penny stocks, so you must spend significant time educating yourself before getting involved with these financial instruments.
In this article, you will learn more about penny stocks and develop a solid foundation from which you can start building a reliable knowledge base. Topics covered will include case studies of those who got rich with penny stocks, the pros and cons of penny stocks, and who should invest in them.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Penny Stocks: A Brief Overview
Before making any commitments, it is essential to develop a brief understanding of the penny stocks and their characteristics. These stocks are traded for less than $5 and are generally found on the Pink Sheets and OTC Bulletin Boards. There is often a lack of information about the background of the companies involved. Companies that float penny stocks are either in the depths of debt or on the pathway to bankruptcy.
Penny stocks are often considered as a trap for luring naïve, inexperienced investors. Countless scams must be studied before you choose to indulge in ignorance. But the question is, have the dubious penny stocks ever been useful to anyone?
Has Anyone Gotten Rich Off of Penny Stocks?
The history of penny stocks is filled with pump-and-dump frauds that have been repeated frequently. However, a deep search in the vaults found the story of Tim Grittani. A report on CNN Business was published about a young man in 2013 who had started day trading with pennies at $1500 in 2010. In 2013, the twenty-four-year-old had managed to amass a million dollars from the teachings of Tim Sykes, the guru of penny stocks back in the day.
The secret sauce of Grittani’s success is not just his luck; it is a strategic investment in a risky venture. He started trading all day on a short-term basis with a flagrant disregard for the possibility of a severe loss.
The sheer inefficiency of the market enabled Grittani to recognize a pump-and-dump deal from afar. He had mastered the practice of betting on companies that were shorting penny stocks to pocket profitable returns after repurchasing them at lower rates.
Tim Grittani’s success story had encouraged many enthusiastic investors, but the success was short-lived as the penny stocks continued to develop an unfavorable repertoire.
Pros of Penny Stocks
Futuristic Approach to Investment
As companies have realized the weak position of penny stocks in the market, they have taken a few cautious steps to fix things.
From hiring effective teams for communication and marketing, financial records management has also improved in the last few years. It must be noted that trending industries such as cannabis and information technology that tend to go big have already been invested in boosting the financial ratios for profitability in the future.
This implies that if an investor chooses to invest in the penny stocks of an up-and-coming startup that gains momentum, then that stroke of luck can help you gain significant returns from a small investment.
Fast and Furious Trading
Despite the notoriety that follows penny stocks, it is evident that they can experience a few episodes of speed and luck that help them yield more investment.
If you are an adrenaline lover who likes to invest in frivolity, then penny stocks might catch your attention. When a penny stock starts moving quickly on the market price, trading becomes like a game of Jenga.
The speed and excitement of trading pennies for better returns can keep the investor engaged and enthusiastic for a long time.
Buildable Asset
Penny stock trading begins at a rate of $5 or less. Such a minuscule rate for securities indicates the potential for high returns.
To illustrate the case with an example, let’s hypothetically assume that you have $1000 set aside for investment in stocks. While that money can get you a few stocks from the market mammoths like McDonald’s or Starbucks, it can alternatively also get you a high volume of stocks from a small company.
Cons of Penny Stocks
Entire Loss
There is no denial in the fact that the majority of the investors lose their entire investment to a fraudulent scheme of penny stocks. If the loss is not absolute, then it is severe enough to cause trust issues with the stock market for a long time.
Penny stocks are thinly traded, which is why their charm quickly enamors investors. This characteristic has led countless inexperienced investors to fall prey to the pathetic pump and dump schemes that are a norm in this market specifically.
In layperson’s terms, the pump and dump scam creates hype around specific stocks and gathers sufficient investors to take the price up. Once the investor community is deceived, the promoter wins a fancy coin while the investor cries to sleep because of the worthless stocks left in their possession.
Substandard Origins
Most of the penny stocks originate from companies close to bankruptcy or obscurity. Moreover, they are often tagged mediocre due to their unfavorable financial ratios and frightening balances. There is also a question of competition and obsoleteness of the industry.
When the end-user invests in the digital landscape, then a company selling typewriters cannot expect to win at the stock market!
Scam Galore
The penny stocks are a risky investment that could leave you at the mercy of scams in no time! As discussed above, the substandard origins of the stocks imply a lack of clarity about the company, their reports, and even the company’s obligations.
The Pink Sheets and Over-The-Counter trading are the most obvious destination for such stocks due to the lack of regulation. The market is inherently down and attracts the wrong breed of companies, so scams are too frequent to be recorded. Even stockbrokers get a fancy penny for trading penny stocks due to the thin trading.
Penny stocks have volatile movements, which make them more of a hassle than an investment. They are also illiquid, which defies the purpose of such an investment in the first place!
Impulsive Valuation
Since there is no strict regulation for reporting penny stocks, they have a unique dynamic of valuations that receive media attention. The easy application of pump-and-dump philosophy has made it easier for scams to name their product, similar to the hit products. The penny stocks of company names sinisterly close to Tesla crashed due to this glitch in the market!
Who Should Invest in Penny Stocks?
- The young investor – Individuals who are new to stock investments can start with penny stocks to experience the ups and downs of investing in stocks.
- The day trader – People managing a portfolio of quick trades for capitalization are more likely to enjoy the adrenaline rush of penny stock investments.
- Those who seek instant gratification – Those who look forward to quick answers can opt for penny stocks as a short-term investment.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Penny stocks seem inherently attractive due to the sheer possibility of high returns. They cost less and are traded thinly. Technically, many consider investing in penny stocks is more like gambling due to the lack of any practical benefits. However, if you know what you are doing and have a well-informed trading strategy, Penny stock trading can yield impressive returns. Hence, it is indeed not a waste of time to invest in penny stocks.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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