Penny Stocks: Risks and Benefits

As the name suggests, penny stocks are stocks that trade at a penny or less. "Multibagger", i.e. stocks that appreciate several times in value in a short period of time, account for a large portion of the stocks traded on the stock exchange.

When it comes to investing in penny stocks, you can think of it like buying a lottery ticket. On the other hand, technical and fundamental analysis can reveal some parts of this lottery. Therefore, the estimated probability of success, where the stock grows several times its current value, can be determined by the investor. Therefore, the allocation of this penny stock depends on this possibility.

The chances of picking the right penny stock and making a profit are very slim. Trading and investing in penny stocks is popular among investors and traders.

This article analyzes the pros and cons of investing in penny stocks to determine the nature of investing in penny stocks.

The pros and cons of investing in penny stocks

Here are some of the benefits of investing in penny stocks.

Low Stock Price

The obvious benefit of investing in penny stocks is that even a small amount of money can be invested in these companies because they are worth a few cents.

Potential more than one return

The great advantage of penny stocks is their potential for rapid growth. Investing in penny stocks is a great way for individual investors to increase their initial capital. In past bull markets, some of the most prominent investors today benefited from penny stocks.

Short-term Volatility

Traders looking for short-term profit opportunities may consider penny stocks because they are more volatile than their more volatile peers.

Penny stocks have a much higher chance of hitting circuit breakers (legal stops imposed on stocks that rise above a threshold score on a given trading day). On the other hand, this can also be unproductive.

We'll look at the downsides of investing in penny stocks.

Low Liquidity

There has been little investor interest as smaller companies issue penny stocks. Institutional investors may only be interested in penny stocks when the market caps of these companies start to rise.

Price Manipulation

Because penny stocks typically represent companies with relatively small market capitalizations, their value can fluctuate wildly. Any institution or individual with a high network can influence the value of a penny stock by acquiring large amounts of stock and further limiting the shares that can be traded.

Insufficient And Asymmetric Information

Penny stocks are inherently dangerous due to a lack of information. Due to the lack of information and information asymmetry in penny stocks, it is difficult for investors to make informed judgments. Risk management is even more important when investing in small stocks.

It is possible to lose money.

All the money invested in penny stocks is easy to lose because they belong to small companies. Due to their size, small businesses are more likely to go bankrupt during times of financial distress.