What Are Penny Stocks and How to Use Them to Your Advantage

by Andrew McGuinness  //  jun. 27, 2018

As you may have guessed, penny stocks get their name because of how cheap they are, accessible to even those investors with financial woes. Some of these stocks can genuinely be bought with a matter of pennies. However, there is one catch. If you are interested in making any kind of substantial profit, your only shot at doing so would be by buying plenty of them.

Penny stocks are often associated with very small companies and startups. Of these companies, most are predicted to have a lifespan cut short due to a limited amount of resources and a general lack of stability. Experts agree that penny stocks are a risky investment, but for the more experienced investors, the risk of penny stocks may be worth a try. So, what exactly can these investors of penny stocks take advantage of?

1. Endless options

The good thing about penny stocks is that because of their very low price, investors are more easily able to diversify their investments, and create a portfolio filled with potential successes and, chances are, some duds as well. But the point of diversifying your investment portfolio is creating a balance of enough varying asset types and profit patterns that drops in the market for some companies will be recovered by the profits made by others. This large array of options does also mean that more research would be required in order to secure some kind of profit.

2. High returns and quick profit

You wouldn’t expect to receive much profit considering how cheap penny stocks are to invest in, but some penny stocks actually offer returns that are quite high. The thing is, most commonly, a high return will come within a short span of time and will be relatively short-lived. This is where the advantage of quick profit comes into play. If and when you do decide to invest in penny stocks, one thing is essential to keep in mind. This is not a long-term investment. It is not advised for you to treat it as such.

Rather, penny stocks are very unlikely to create profit for longer than a year. The first few months, the ‘honeymoon’ phase of penny stocks, is when they will usually gain the highest returns for their investors. If you do witness a substantial growth within these first months, it is likely that the profits of your investment will not grow to be higher than that at any point in the future. Treat penny stocks as a short-term investment. If you would like to play it safe, pull your investments no later than a year after you have made them.

3. Potential

It’s easy to assume that most if not all penny stocks are attached to start ups with very little potential. But if you take a closer look into the market of penny stocks, and do research into the company backgrounds, especially company management, you may be surprised at how much potential there is to offer. There are actually plenty of start ups with penny stock investments that are led by experienced managers who took part in the successes of other profitable companies. A good manager is something essential to watch out for in terms of potential.

Conclusion

Penny stocks are a good idea only if you already have a reasonable amount of experience as an investor and are prepared to do plenty of research into the background of start ups, their future plans, and the way they are being managed. If you do happen to invest in penny stocks successfully, you may not only reap a high return, but one that will come much quicker than you think.





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