The chance of turning small investments into significant gains has fuelled the popularity of penny in recent years. The number of investors showing interest in them have also increased, with more people using penny stocks as an entryway into equity market investment.
This brings us a question that asked quite often: Can one get rich off penny stocks?
The answer is not straightforward. On one hand, investors do often make significant, even large, gains in the long run from investing in discounted penny stocks. However, it is important to remember that penny stocks are highly volatile and different from traditional stocks. Hence, the risk level is also substantial when investing in them.
Before you invest your money in penny stocks, there are certain factors one should keep in mind. If you are wondering how to make earn significantly from penny stocks, here are some things you should know first.
Identifying A Penny Stock
It is generally perceived that a stock trading under one dollar value is a penny stock. However, according to the US Securities Exchange Commission (SEC), stocks that trade under C$ 5 apiece should be considered as penny stocks.
Apart from the price, investors should take note of the market capitalization, that is, the total dollar value of outstanding shares issued by the company.
The market cap of a penny stock company should be between C$ 60 million to C$ 300 million. For instance, if a stock is trading under C$ 5 and its market cap is C$ 1 billion, then it wouldn't classify as a penny stock.
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Finding The ‘Best’ Penny Stocks
There are thousands of penny stocks out there, but not all of them are likely to produce significant returns. Many stocks are not even listed on the major stock exchanges in the world and are available at over-the-counter (OTC) markets.
Before investing in a penny stock, one of the most important thing to do is to check the company’s history, financials, business operations, sector details, etc. and gather as much information as possible.
For example, if a company's business model depends on coal, it would likely not be an appropriate choice as many countries are shifting their focus to green energy to combat climate change.
Experts often advise that investors should seek out penny stocks that are listed on a major stock exchange, as they would have needed to meet minimum financial and disclosure requirements to get listed.
Selling or buying penny stocks at OTC exchanges could also reportedly be a tedious task.
Penny Stocks That Made People ‘Rich’
It is not a rule set in stone that a penny stock company will turn into a multimillion-dollar corporation. However, there are some examples that stand apart. Market experts believe that penny stocks have fewer chances to reach a huge market cap, but every company starts its journey somewhere and, often, keeps climbing the ladder of success.
Let's take the example of Monster Beverage Corporation (NASDAQ:MNST, MSNT:US), which held its initial public offering (IPO) in 2003 and began trading just under US$ 0.1 per piece. At market close on Tuesday, June 1, MNST stock was trading at US$ 93.59 per share and as per NASDAQ data, its market cap is worth US$ 49.5 billion.
The above constitutes a preliminary view and any interest in stocks should be evaluated further from investment point of view.