Even as penny stocks are prone to high risks, they are known for their enticingly low prices and manage to allure small investors. At the heart of their undeniable allure, lie attractive returns that some of the penny stocks deliver every now and then. However, for prudent investing, these stocks should always be traded with a great deal of caution, owing to their risky nature.
A penny stock is generally referred to a stock of a company with low market capitalisation, which is valued less than a dollar. Such stocks lack adequate liquidity in the marketplace. Generally, investors find it difficult to sell these stocks in absence of enough buyers at a given time. There is no point in holding a penny stock forever as it carries inherent risk because of high volatility. So, investing in such stocks should be a short-term affair and investors should not invest and forget their penny stock holdings. Investors should book complete or partial profits if the stock sees a steep surge.
Investors should always buy penny stocks with reasonably higher trading volumes since they are generally thinly traded. It helps investors to offload these stocks easily in case they want to make an exit. One must not only look at a day’s trading but consider the monthly average of trading volume.