Are Penny Stocks a Smart Investment Idea?

Investing money in some type of stocks market is always a good idea, especially if you wish to diversify and ensure that your money is working for you. However, all stock markets have their good sides and their bad sides. For instance, with the most traditional stock markets, the potential earnings are not that high unless you invest huge amounts of money and they also take some time.

You have also probably heard of penny stocks which offer high yields in a relatively short time and which also offer the chance of getting into the game without investing that much money. So, what exactly are penny stocks and are they a smart investment idea?

The Basics

Penny stocks are the shares of relatively small companies that have gone public and whose shares are much more affordable than those of some larger companies. In general, penny stocks are those shares which cost less than 5 dollars per share. In reality, these prices are usually even lower which is why these stocks got their name.

It needs to be said that these stocks are 100% real and that they are the shares of existing companies which are operational. These stocks are not a scam in any way. They are, however, very specific and they need to be approached carefully.

The Risks

First of all, you should understand that penny stocks are not traded on the same markets as the more traditional stocks of bigger companies. Due to the fact that the shares are so cheap, there are special markets where these are traded. Because of this, there are fewer regulations that are enforced less strictly to the market. Still, it needs to be said that they are regulated and that they are not a complete Wild West.

Unfortunately, due to the lax regulation practices, these stocks may be subject to certain illegal and dishonest practices. For instance, a practice known as pump and dump is known to be done with penny stocks where initial investors artificially buy shares of a certain company, pump their value to attract investors and then sell those shares before the real price is revealed.

In addition to this, even when there is no foul play, the stock market for penny stocks is extremely volatile, meaning that shares can gain and lose in value very substantially and in very short time span. This means that one can lose a lot in this market if one is not careful.

The Allure

To continue our idea, with penny stocks it is also possible to earn quite a lot in a very limited amount of time, once again because of the market which is always fluctuating. Just as you can lose, so can you win. This is one of the main attractions of penny stocks and the main reason why so many people trade in them.

Furthermore, the initial investment does not have to be as big as it does with traditional stocks as penny ones are much cheaper and one can purchase a lot with a limited amount of money.

Finally, a smart trader can earn a lot in a very short time due to the very active and volatile market which is much more rapid and faster-changing than the traditional stock market.

Final verdict

In essence, penny stocks are a very attractive market where one can have much success if one is smart about their investments. One needs to make sure they are trading only in penny stocks that are liquid and that are actually traded. One also needs to ensure that they have a plan that they will stick to no matter the circumstances. One should also advance their knowledge and learn from huge players like Timothy Sykes, a penny stock trader who made millions while still in college and who currently helps people around the world make money just like he did.

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