- Penny stocks are cheap is comparison (less than C$ 5 apiece).
- They can also help you enter the stock market universe with smaller investments if you are a new investor.
- However, due to their smaller market cap, penny stocks also tend to be riskier and more volatile than others.
If you are an investor who wants to or has little money to invest in stock markets, penny stocks can be a helpful option for you.
Penny stocks are not only cheap (less than C$ 5 apiece), but also help you enter the stock market universe with smaller investments if you are a new investor.
However, due to their smaller market cap, penny stocks also tend to be riskier and more volatile than others.
Since research should ideally be the first step to investing, here is everything you must before adding penny stocks to your investment portfolio.
What are penny stocks?
Small and, in some cases, new companies that hold a market capitalization of C$ 60 to C$ 300 million and have a stock price of less than C$ 5 apiece are referred to as penny stocks.
Penny stock companies are usually startups or small businesses with limited growth, cash reserve and operations. In most cases, these are companies that still have a lot prove about their business model and services.
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Pros of investing in penny stocks
Penny stocks can come in handy for investors looking to spend little cash. The amount you may spend on a handful of expensive stocks can buy you a lot more of penny stocks.
Since the investment is generally smaller in penny stocks, your risk level is also smaller. For instance, say you have C$ 10 to spare and you are putting it in penny stocks. In case of profit, you may make some money, but in case of a loss, you will only be losing 10 bucks.
Penny stocks are also often preferred by investors looking for short-term gains. While most stock investments require a long term to demonstrate proper upward growth, such as growth stocks and value stocks, penny stocks can reflect a notable surge in a short period of time.
Cons of investing in penny stocks
In the efforts to get their business off the ground, penny stock companies are also often known to take up significant debt and risks. Therefore, when you invest in a penny stock, you essentially take a share of this risk and bet on the chances that the company will succeed.
Unlike growth stock companies, penny-cap firms are generally not fast-growing businesses. While there are chances of such small companies making it in the long run, there can also be failure. Hence, one can lose their entire investment in penny stocks if the company goes bankrupt.
Since investment in penny stocks are small, the gain is also comparatively small. Therefore, in order to make significant gains in penny stocks, you will have to invest in high levels, which, in turn, will increase your chances of loss as well.
How to trade penny stocks in Canada?
Canadian investors can find an assortment of penny stocks across major stock trading platforms. As for sectors and industries, a majority of them can be found across energy, mining, tech, cannabis, and pharmaceuticals markets.
While not many penny-cap companies make it to the Toronto Stock Exchange (TSX), a bunch of them can be found on the junior platform of Toronto Stock Exchange Venture (TSXV).
An investor interested in penny stocks can reach out to brokers who can trade on their behalf or explore online brokerage options.
Once you have chosen either of the two ways, the rest of the process of investing in penny stocks is the same as any other share trading: open an account, select a penny stock (preferably after thorough research), and begin trade.
Due to its high levels of volatility and risk, brokers can ask penny stock investors to sign a disclosure before investing to avoid future troubles.
How can Canadian Investors buy Penny Stocks ?
While their growth prospects are uncertain, some penny-cap companies can go on to record significant growth margins and, in turn, bring their investors notable gains.
But penny stocks investors ought to bear in mind that not every investment in penny stocks can become a “rags-to-riches” story. So, put your eggs in the penny stock basket only after thorough research and risk preparation.