- September 19, 2022 03:45 PM AEST
- Aditi Sarkar
Frequently Asked Questions
What Are Penny Stocks?
Analyzing a small-cap company is sometimes more difficult than doing the same for a large-cap company. The reason is the limited financial history of the company and often poor fundamentals, which make it difficult to estimate the future potential of the business. Fundamentals of a small cap can change very quickly and therefore, long-term projections are often more skeptical. Investors’ conviction and knowledge up to the industry level constitute a good part of investing in small caps. Also, investors should not get carried away by one-time windfall profits by the company as the sustainability of these profits is not proven and often is questionable.
Can You Make Money With Penny Stocks?
In one word, the answer is yes. But the answer would remain the same for the question “can you lose money in penny stocks?” However, there are a few things to consider while trading in penny stocks that can increase chances of net profitability. Penny stocks are highly volatile, therefore, quick and agile decision making is an imperative skill to possess to minimise frequent whipsaws. Good execution skills are also required to minimize the impact cost, incurred due to poor liquidity. In a nutshell, making money from penny stocks largely depends on skills of a trader.
How Do You Buy Penny Stocks?
Penny stocks are as easy to buy as stocks of other companies. An investor needs to contact a registered stockbroker of his country, who is affiliated to a recognised stock exchange. After opening a trading account with the broker, an investor can transfer funds into his trading account and start buying/selling penny stocks of his choice. However, before arriving at a decision to buy or sell, investors must do proper due diligence and adhere to robust risk management before putting their hard-earned money on the line.
You should Avoid or Buy penny stocks?
It is up to investors to decide whether they want to take high risks in their quest to chase higher potential profits or they are satisfied with steady returns from large-cap stocks. An investor with less capital, with a preference for risk aversion and who is also not capable to sustain high volatile periods, should avoid buying penny stocks. On the other hand, a short-term aggressive trader, having vast experience in the stock market can look for penny stocks, only after devising a proper risk management plan. As a note, a majority of institutional investors or big funds prefer to stick to large-cap stocks with well-established businesses.