Any thoughts of investing in penny stocks requires investors to be willing to take greater risks than investing in bigger companies. The term penny stocks refers to companies whose market capitalization is at a level that is considered very small in relation to the average market capitalization of a publicly traded company.
Typically, penny stocks can be found trading on the smaller stock exchanges, though there some very small companies listed on the big exchanges like the Nasdaq as well. It is easy to forget that Microsoft too was once a penny stock when it first went through its initial public offering. Before investing in penny stocks, it is critical that you are fully aware of the possible risks and the objectives of investing in such stocks.
If you are new to investing in shares then you should stay away from investing in penny stocks because they involve too much risk for someone learning their way into the.
Appreciate that there is far greater risk attached to investing in penny stocks than bigger companies. A small price movement would result in big changes in the value of your holding because the percentage change will have been a lot greater.
Most small caps are not likely to pay dividends, as they are likely to retain any profit they make to reinvest in the business. Most penny stock investors understand this because they expect capital growth in the short to medium term, so the value of their holding will grow as the share price appreciates in value.
Whilst there is plenty of information from financial data providers on big companies on their fundamental data and news flow, it can be extremely difficult to obtain such information on small companies, it is even more difficult on companies that are listed on the small stock exchanges. This is because not many analysts follow small companies.
You should avoid any company that you do not have sufficient information on. Investing in companies on hunch is a recipe for disaster.
There are still plenty of small companies that get good coverage from analysts and have their news tracked by wire services.
Day traders may use technical analysis to trade small companies. These can potentially offer very lucrative gains in very short space of time because change of a penny in the price of a penny stock often results in big paper gains, but conversely big losses if they go in the wrong direction than expected.
The main reason for buying penny stocks or other very small caps is to be able to spot the next big company while it’s still in its infancy, so to speak. The rewards can be enormous. Many people have become millionaires as a result of investing few thousand dollars in few tiny companies.
