Can you count on penny stocks to make money?

Summary

  • As much as it is possible to make a decent sum of money from investing in penny stocks, it is much more likely that your hard-earned savings can be completely wiped off.
  • Everything boils down to how well an investor understands the investment and how well he manages his risk.
  • Before investing in penny stocks, an investor needs to make sure that there is enough liquidity for him to easily transact.

One of the most commonly asked questions when it comes to penny stocks investing/trading is – is it really possible to make a considerable sum of money trading them? For those who are looking for a straightforward answer, it’s very much possible.

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Although, the answer may be short but it’s not that simple to understand the nuances of a small cap, especially penny stock trading/investing. As much as it is possible to make a decent sum of money in penny stocks, its much more possible of getting completely wiped off from the market before one can see the account growing.

An investor needs to understand that, virtually, any asset that is being freely traded in the market can get you money, be it speculative penny stocks or the highly volatile cryptocurrencies. On the contrary, these very assets can easily put a major dent in one’s investment account if an investor is not careful.  

Everything boils down to how well an investor understands the investment he is putting his money in and how well he can manage the risk involved. Be it a penny stock or a large-cap stock, any investment can go wrong and here the risk management kicks in, which can save you from blowing your account up. With that being said, lets have a look at some key considerations that can help you up your game with penny stocks.

  1. Price versus value

Most of the penny stocks are just like junk bonds which are up for grabs but probably not worth adding to your portfolio. Every stock is backed by certain fundamentals with respect to that company, which sooner or later decides the price of its shares. Most of the times, the company is barely staying afloat, posing a very high risk for an investor.

However, there is a thumb rule in the financial markets, high return stocks are prone to high risks. If an investor is willing to take a high risk, he might also be rewarded handsomely in case of turnarounds in the company.

  1. Trading volume

The volume of trading in any security plays a crucial role in determining the impact cost of a transaction, which further impacts the profitability of the net returns. Penny stocks are often less interesting space for astute investors who are majorly responsible for liquidity due to their large sums of money.

Therefore, before investing in penny stocks, an investor needs to make sure that there is enough liquidity for him to not to get affected much by the impact cost.

  1. Rumours versus reality

Due to a thin interest in penny stocks, they are mor susceptible to manipulation. Even the slightest buzz of a positive development can inject adrenaline in the stock and make it fly high. Most of the times, these news are fake and are intentionally spread to trap investors.

Therefore, while investing, one needs to separate these fake rumours from the real flow of information. As stated earlier, if there is a turnaround happening in the company – let’s say by new capital infusion, that could be a real deal.

  1. High volatility

Penny stocks are highly volatile compared with their larger peers such as mid-caps or large caps. The premise being larger and well-established companies are more stable than very small of new businesses, which is reflected in the behaviour of their share price.

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However, volatility is not always bad. Consider volatility like a two-sided sword, in the hands of a master – it’s a deadly weapon, and an untrained one can injure himself. There are many trading strategies that are based on aiming to profit from an expansion in volatility. Therefore, knowing how to play volatility could lead to high profits in volatile scrips such as penny stocks.

Read More: Three tips to withstand market’s volatility

So, should one invest in penny stocks?

There is no silver bullet to this question and the answer varies from investor to investor. However, if one thinks making money in penny stocks is easier because of high returns, well there are no free lunches in the stock market. If one is aiming for excessively high returns, one must be prepared to take equivalent risks (if not more).

Read More: Five penny stocks raking in big gains today

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