Penny Stocks – Definition, Features, Benefits, Limitations, Risks And Future Prospects

Penny Stocks - Definition, Features, Benefits, Limitations, Risks And Future Prospects

Penny Stocks: Too Risky? 

Stocks are pretty risky anyway, and penny stocks are even relatively bigger high-risk investments. But that is not a bad thing if all goes well. This is simply because you stand to make a lot of money if the risk factor pays off. After all, the more risky your investment, the more money you stand to make!

However, it all depends on your experience. Investing in stocks is always risky, and the market can move any way at any moment. That is precisely why experience and a little expertise are what you need for achieving success in the stocks market, especially when it comes to risky investment alternatives. 

So without wasting any further time, let’s dive straight into the intricacies of penny stocks! 

More About Penny Stocks: 

Before talking about the benefits and risks of investing in penny stocks, let’s find out more on the same. 

What Are Penny Stocks? 

What Are Penny Stocks

A penny stock can be defined as the common share of any small company that is public, traded at low prices. Now the specific definition of the same varies from country to country. For instance, the concept of ‘penny stocks UK’ varies differently from that in the United States. While these stocks are traded at a price lesser than five dollars in the US, the same is done in the UK for one pound. 

The term microcap stocks are applied to these stocks since their market capitalization is less than 250 to 300 million dollars. In fact, most of these microcap stocks are usually traded over the counter, while some are traded in big markets like the New York Stock Exchange market or the NASDAQ. 

It is only natural that you must be looking for an example to understand these stocks in a better way. Here’s an example! Have you heard about (known as before)? The shares of this famous hospitality site were traded at 1.08 dollars per share, and that too in 2001. However, today the same shares will cost you 1,965 dollars per share!

Features Of Penny Stocks: 

Features Of Penny Stocks

Before googling ‘Reddit penny stocks’ or investing in them randomly, find out the features and characteristics of the same. Thus, the features of penny stocks are as follows, 

  • High Returns – As compared to any other form of security in the investment world, penny stocks are known for providing higher returns. In addition, since these stocks are generally issued by small companies, they come with substantial growth opportunities
  • Low Cost – All definitions of these microcap stocks mention that the primary feature of a penny stock is its low price. So naturally, since these are issued by small companies, the price is going to be low, especially considering the risk factors associated with the same. 
  • Low Liquidity – A very obvious reason as to why penny stocks have low liquidity is because these are traded ‘over-the-counter.’ This also means any investor would not be able to sell these off when the time is right. It also leads to a fall in trading volumes. 

Penny Stocks: Benefits, Limitations, And Risks

Penny Stocks Benefits, Limitations, And Risks

If you are googling ‘penny stocks’ right now, don’t forget to add your location. For example, if you are based in the UK, you need to google ‘best penny stocks UK.’ This is because there are several details that can vary from country to country. However, a few things always stay the same no matter where you are located, like the benefits of investing in these stocks and limitations of the same. 

Benefits Of Penny Stocks: 

Benefits Of Penny Stocks

The benefits of investing in penny stocks are several. Scroll down and find out the top advantages of investing in these stocks. 

1. Massive Returns

The whole concept of these microcap stocks not only sound risky but also really risky and volatile in reality. But at the same time, the returns from these stocks are usually pretty high. In fact, the potential for high return is so much that these can achieve pretty great growth and that too within a short period of time. Consequently, these have gained a lot of popularity amongst investors. 

2. Cost-Effective 

As mentioned before as well, penny stocks are pretty cheap, making them lucrative investment opportunities for expert investors – who does not want to make a lot of money from a small investment? That, after all, is how the whole game of investment works? For instance, these stocks are sold at 1 pound or lower in the UK, and in the US, it’s sold below five dollars.  

Limitations And Risks Of Penny Stocks: 

Limitations And Risks Of Penny Stocks

After finding out the advantages of investing in microcap stocks, your might is obviously wandering to the penny stocks on eToro. But let’s put a stop to that! Instead, let’s figure out the limitations of penny stocks. Scroll down to find out the limitations of investing in these stocks!

1. Low Liquidity

As discussed before, penny stocks have a low level of liquidity. These stocks are mostly traded ‘over-the-counter,’ and as a result, the liquidity is low. As a result, investors are unable to sell these shares off when the time is right. Additionally, the low liquidity of these stocks leads to a low trading volume as well. Subsequently, even a small transaction can cause big changes in the price of shares. 

2. Limited Information 

Penny stocks are most often issued by small companies who are new in the market with hardly any historical data. Since these companies have relatively less information on assets, revenues, operations, it becomes risky to invest in stocks issued by them. Moreover, these companies are also not required to submit any report with regulatory authorities, which makes things even murkier. 

Frequently Asked Questions: (FAQs):-

1. How Do You Identify Penny Stocks?

Ans: You can easily identify these stocks by checking the following factors, 
⦿ Low cost and trading volume
⦿ High-risk factor
⦿ Inconsistent fluctuations in price
⦿ Erratic results

2. Is It Good To Invest In Penny Stocks?

Ans: If you are new in the investment market, it’s best not to invest in these stocks since there are so many risks and limitations associated with them. But if you have been playing this game for some time, you can always opt for a little risk and a potential for high returns!

3. Should I Avoid Penny Stocks?

Ans: Penny stocks are your solution to become rich quickly, but the risks associated with them are just too many. This is known to be a high-risk investment opportunity anyway. As a result, if you have some experience in the investment world, you can try these out for a change. But if you are new to the scene, it’s best to avoid these stocks. 

Wrapping Up: Future Prospects Of Penny Stocks 

The volatile nature of Penny Stocks makes it evident that these are risky investments but should that stop you? At the beginning of this article, the example of indicates that even investing in such stocks over a long period can prove to be an excellent money-making opportunity. 
Thus, we would recommend a little experience in the investment world before venturing out to find out more about ‘penny stocks on trading 212’. If you don’t have the experience, it’s better to leave these stocks alone – a little expertise is vital for successfully investing in these stocks!

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Barsha Bhattacharya
Barsha Bhattacharya is a senior content writing executive. As a marketing enthusiast and professional for the past 4 years, writing is new to Barsha. And she is loving every bit of it. Her niches are marketing, lifestyle, wellness, travel and entertainment. Apart from writing, Barsha loves to travel, binge-watch, research conspiracy theories, Instagram and overthink.

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