Reading Time: 5 Mins
By Team Ace Investors
Why Invest in Penny Stocks
Penny stocks are stocks of small companies that are either at a very young stage of their operations or they have not grown much for various reasons. Penny stocks companies usually have a unique idea or a business model that can offer extremely high returns over a period of time.
It is generally believed that the penny stocks will have poor fundamentals and they are basically just operator driven stocks. This is not true. These stocks can best be described as highly speculative and tend to exhibit significant price volatility – i.e., there is likely to be substantial inconsistency in their stock price movement.
Investors who have a high-risk appetite and are ready for any possibility that they may either earn extraordinary returns or lose part of their investment should consider investing in penny stocks. The only important factor to consider here is your risk tolerance.
What Best Describes the Features of Penny Stocks?
- High Volatility – Sudden attention by investors can cause major price fluctuation. A small increase/decrease in price can cause huge volatility in your portfolio.
- Low Volume – Penny Stocks generally are thinly traded so one might not be able to book profit/loss by selling in the stock market immidiately.
- Not Tracked Widely – Since these stocks are not tracked by many investors/traders, there is a lack of research/information available on them.
- Manipulation – This is the biggest risk associated with investing in penny stocks. Avoid purposely floated rumors by operators and do some amount of research or seek advice from experts.
Why is it Attractive to Invest in Penny Stocks?
- Low Price per Share – Investors can buy a huge quantity of penny stocks with little investment. You can have something significant and sizeable amount of quantity.
- Immense Potential – By investing in penny stocks operating with unique business and at a young stage, you are likely to grow your money in line with the company's growth or profitability.
- Small or Sudden Movement Gains – Even a small increase in a price can translate into a sizable profit. There are high chances that you will make money in a short span of time.
- Potential to Grow Big – Sometimes a penny stock company will grow and become a mid-cap stock which can multiply your portfolio value several times over.
While investing in penny stocks, you need to be very cautious. We believe that if your risk appetite is strong then investing in penny stocks can prove to be a profitable strategy for you. As earlier said, the price of a penny stock can drop in value so quickly which is why new or inexperienced investors should always take the help of experts if they want to get exposure in penny stocks.
______________________________
Fun Fact – John Templeton started out by buying into 100 stocks in more than 100 odd companies in 1939, all of which were penny stock investments. From there Sir John Templeton went on to become one of the most celebrated stock investors of all time.