The stock market can be a scary place. So scary that many people turn away from investing before they really even give it a chance. Penny stocks, to those who know what they are, can provide a seemingly easy way to enter the stock market.
Some experts would adamantly disagree. Here are a few reasons why many investors avoid penny stocks, and why you shouldn’t. But first, it’s important to understand exactly what a penny stock is.
What Are Penny Stocks?
Although you might expect a penny stock to cost just a penny, they are actually anything that can be traded for less than $5. Although there are some cheap stocks on the big exchanges, generally, a stock is only considered a penny stock when it isn’t listed on a major exchange.
They are appealing to people who don’t have a lot of money, want to get into the stock market, and want to get rich quick. Unfortunately, it doesn’t work this way.
Knowing your stuff by researching a penny stocks 101 guide first is important. You’ll learn why penny stocks aren’t really what they’re cracked up to be, but that doesn’t mean you should avoid them altogether.
The Problems With Penny Stocks
There are quite a few reasons why many say penny stocks are dangerous:
- The company is dying: If a stock isn’t priced well, it could be because the company is dying, and a dying company isn’t going to pay out.
- You’re more likely to lose all your money: Because penny stocks are on such shaky ground, you shouldn’t be surprised if you lose all your money.
- Selling is hard: Penny stocks are cheap because no one wants them. That means when you’re ready to sell, you probably won’t find any buyers.
- It could be a scam: Other people are looking to get rich quick too, which means they create stock market scams. These scams are most likely to show up in penny stocks.
- Fewer requirements: Companies do not have to report assets, income, or revenue, and there are no minimum share price or shareholder equity thresholds that need to be met.
Why You Should Ignore All the Problems and Go for It
Those are some good reasons to stay away from penny stocks, but let’s not forget that the stock market itself is risky! That doesn’t mean that you hang up your hat and throw in the towel. Instead, that just means you should do your research.
There are still plenty of people who invest in penny stocks because:
- You can diversify your investments with less money
- With greater volatility, you can learn more about the stock market
- Prices can go up very quickly
- They’re a great way to get started in the stock market
Sure, penny stocks can be scary, but that doesn’t mean you shouldn’t give them a try! Take the time to make informed choices, understand that you won’t get rich overnight, and you can definitely make penny stocks work for you.