Penny stocks are mostly considered a high-risk, high reward investment type. These equities trade at below $5 a share and might only trade over the counter through “pink sheets.” There’s a handful of pros and cons to consider before deciding to invest in penny stocks. You should thoroughly understand the inherent risks in doing so before you invest.
Pro: Successful penny stock investing can make money, fast.
One of the main reasons people even consider investing in penny stocks is the potential to make a lot of money and quickly. The daily news cycle can massively impact these low overhead stocks, driving prices high for limited windows before falling again. Plenty of penny stock companies are small-time start-ups hoping to make it big. These companies are untested either in leadership or product potential, but they are growing and hoping to raise funding for future projects. There’s lots of potential profit in penny stocks, but no guarantee you’ll pick the winning one. Penny stocks are the equivalent of investing in lotto tickets that may or may not pay off based on events in the future. Still, you see tons of stories in the news about people who have made a fortune investing in penny stocks.
Con: Penny stocks are inherently risky due to their volatile nature.
While it’s fun to speculate how much money you could make if your penny stock goes to the moon, it’s also possible that the stock could plummet and you lose 95% of your investment in a matter of days. Investing in penny stocks carries inherent risk because of the volatility of them. A company may not be profitable for years, or you could wind up inadvertently investing in a pump and dump scheme that is designed to bulk naive investors out of their money.
Pro: Penny stocks trade for less than $5 per share.
Because of their low price, penny stocks are easy to start investing in. This low price can be a double-edged sword for naive investors who go all in, though. You should never put more than you’re comfortable completely losing on a penny stock. You should also thoroughly understand the company you’re trading and their business model. A good rule of thumb with penny stocks is if the deal seems too good to be true, it probably is.
Con: It’s hard or impossible to see the financials of penny stock companies.
One of the most significant problems with penny stocks is the lack of information available about the company. These companies haven’t attracted the eyes of big investment firms who analyze their performance yet. That’s because companies worth less than $10 million and with fewer than 500 shareholders are not required to file financial information with the SEC. With no financials to look at, you’re left relying on the news cycle about the company and the sentiment of other investors. That’s not to say no financial information is available about penny stocks, but that it can be harder to come by for those trading over the counter.