The pros and cons of trading penny stocks

Reliablecounter Team

When it comes to penny stocks, there are two distinct worlds that are as different as day and night. On one side, there are stories of massive profits, instant wealth, young millionaires but on the opposite side; those of bankrupt companies, illegal activities, scams and lost investments.  The reality on the ground however is lost in between the two extremes. Before we look at the pros and cons of penny stock trading, it is important to acknowledge that the industry is full of both the good people and the bad people. There are honest people who are just starting out in business and on the other hand, there are con artists in business suits ready to rip you off. Just like https://www.timothysykes.com/penny-stocks/, we are going to look at the advantages and disadvantages of penny stocks.  

 

The pros of penny stocks

Penny stock has many advantages for investors. This includes:

  • You can be the big winner of tomorrow. Today, there are many reliable companies that have shares trading for pennies. These companies have proven management teams, growing market share, stable financial positions, improving financial ratios and disruptive products that are set to dominate the market.
  • The investment is exciting. Just like any other form of investment, people are always exited about making profits. If you are able to make about 5% per year on penny stocks, the investment will be very exciting and enjoyable.
  • Turning small investments into fortunes. With small amount of money, you can be able to engage in penny stock trading. For example, if you have $500, you can buy thousands of penny stock shares. On the other hand, if you invest the same amount in the main market, you are only going to buy two or three shares. Therefore, penny stocks have the ability to turn small investments into fortunes.  
  • Speed. Another benefit of penny stocks is that prices can increase fast. Unlike other stocks in the market that have a steady stock price, penny stock prices can fluctuate very fast. With penny stocks, you can make a fortune within a day.

 

The cons

On the other hand, there are shortcomings associated with penny stock trading. This includes:

  • Low quality companies. Majority of penny stocks are low quality companies. Such companies lack organized operational structure, their balance sheets are a wreck and their operations make losses. In addition, the companies have questionable products that add little value in the market.
  • Most investors lose money. Just like gambling, most penny stock traders come out with less money than they started with. This is a painful truth that you need to know. However, with the right strategies, you can be in the group of the lucky few who get successful in this trade. You just need to overcome all the odds that are stack against you.  
  • Risky markets. Although there are some penny stocks that trade on major exchanges such as NASDAQ, NYSE and the American Stock Exchange, majority of them use low quality exchanges. Those that are listed on the major stock exchange are normally of companies that have met listing standards, investor communications and reporting requirements. On the other hand, the low quality companies with the lowest priced shares are listed on exchanges such as OTC and Pink sheet where listing fees, regulation and other requirements are almost non existent.
  • Shocking valuations. Another disadvantage of penny stocks is that they come with ridiculous valuations.  We have seen some of these stocks in the public limelight claiming to be having a very high value but in reality, they are worthless. Unfortunately, many people are lured to get the shares thereby pushing their prices up. They come to realize later that the shares were exaggerated and cannot sustain their prices and in the end, make huge losses.   
  • Different stock broker regulations. Unlike in regular market where stock brokers are subjected to the same regulations and rules, penny stock trading has different set of rules for these brokers. For example, stock brokers get higher commissions for trading on penny stocks and on the other hand, most of them will not accept trading orders.  
  • High volatility. Stock price volatility is only good when it goes the way. However, it can come back biting when it is your turn to lose tones of money. In short, the only person assured of making money through penny stocks is the promoter. Everyone else stands losing.