There is no doubt that penny stocks are a fascinating subject that can make for a particularly fascinating trade. However, before you get started and start splashing your cash on numerous over the counter trades, there’s a lot of information that’s good to know. Whilst at this point you might think it merely something that’s interesting to know, being aware of stories, trading patterns, and what’s happened to penny stocks in the past could be massively beneficial to your penny stock trading portfolio.
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Why Is There Such An Interest In Penny Stocks?
It is relatively well-known that the vast majority of major and experienced investors are likely to steer well-clear of penny stocks. However, whether or not this is for their own good, or simply due to the fact that they don’t know how to trade them properly, is what should be questioned.
There’s no doubt that penny stocks are, almost all of the time, a high-risk investment. The penny stocks market is abundant with shares up for sale in companies that are in a very bad financial position, and thus need to sell their shares at such a low price in order to obtain fast capital that they hope will help them get back on their feet. If it does, then great. However, in a lot of cases, it does not and will result in investors losing out considerably.
On the other hand, a lot of people view penny stocks as a way to make a lot of money in a shorter time frame than normal. Whilst penny stocks can certainly provide a lot of money, you need to know exactly the correct type of investment to look for. It’s also unlikely that they will provide you with a lot of money in any short frame of time.
It’s important to go into penny stocks trading with the correct frame of mind. If you’re starting off thinking that you’re going to have made a tonne of money by next week, then you are most certainly not anywhere near the frame of mind that you should be in. You should be instead of thinking about what penny stock looks like the best investment for your money based upon a number of factors.
You should look at penny stock trading as a marathon, as opposed to a sprint. It’s something that if you work hard and closely at for an extended period of time, is much more likely to return you a good result than if you go all-in at the start relying on an uninformed choice.
What Are The Risks And Why Do Penny Stocks Often Go Downhill?
People are constantly saying that penny stocks are a high-risk investment and that there’s a chance of them going downhill very quickly. Of course, as is the case with a lot of investments this is most certainly true.
However, the reasons that penny stocks are risky and could go downhill are slightly different from other investments. One of the main reasons that penny stocks can be volatile is due to the lack of liquidity on the market. Penny stocks, as you may or may not know, do not trade on major markets. Penny stock trading instead takes place through over the counter trades.
Lack Of Liquidity
There are many brokerages online on which you can purchase penny shares. Penny shares can also be purchased over the phone, and via pink sheets too. However, what this means is that fewer trades are taking place compared to the regular stock markets. On the major stock markets, large numbers of trades are taking place every minute.
With over the counter trades, however, stock trades are far less regular and the market is not nearly as followed since there are not as many interested investors. What this means, is that the market has a lack of liquidity – that is, a lack of regular trades. This means that, should you decide that you want to buy or get rid of security quickly, you may have trouble doing so as there may not be as many interested buyers as you would hope.
In short, the lack of liquidity in penny stocks trading makes it a more risky business, since it’s harder to make trades happen quickly.
There’s Not Enough Data Available
As should be the case with any investment that is made, that investment should be based upon a reliable source of information, that provides the investor with the current state of the company, as well as a means of prediction as to where the company could go within the investment period.
However, the availability of this data is often very poor when it comes to penny stock trading. Since the companies that are trading penny stocks are often not established or are very small and not well-known, there is not much information available publicly on their happenings. This often results in investments being made into them that are based on little to no information.
There’s No Standard To Be Met
On large stock exchanges, each company that lists their shares for sale must meet certain criteria in order to do so. With OTC- traded stocks, however, there is no such set of standards that must be met. Having such minimum standards in place that have to be met by companies ensures that the stocks available for purchase at least make for a chance of a fair investment. Without the requirement of minimum standards, the purchasing of stocks and shares becomes even riskier.
In conclusion, there is no doubt that, given the right circumstances, investing in penny stocks can make for an extremely lucrative investment indeed. However, it’s recommended that the risks be considered, as well as the maximum amount of information on any stock be obtained before an investment decision is confirmed.