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Summary
- Shares that trade on UK stock exchanges for less than £1 are known as penny stocks.
- The definition has been broadened to stocks that have value over the guideline prices.
- Good research is the key to unlock good value in the case of penny stocks.
Investing in penny stocks might be as enthralling as buying a sports car, but if there is a crash, loss could be irreparable.
Several big names at one point of time had traded under £1 a share, which include the well-known names of Monster Beverage, Ford, and JD sports. Investors who put money in these companies during their penny days have gained substantially in value over time.
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Here is a guide on whether penny stocks can make you rich or not.
What are penny stocks?
First, let us understand what is a penny stock, shares that trade on UK stock exchanges for less than £1 are known as penny stocks. If the share price is low, the nature of investment is considered speculative.
However, the definition has been broadened to stocks that have value over the guideline prices. These stocks have high volatility, which makes them riskier than established stocks but also ups the chances of huge growth.
Is it worth investing in penny stocks?
As is the norm with any stock market investment, good research is the key to unlock good value. Penny stocks of companies that have had a healthy growth pattern can end up giving you good value. But the main challenge is to find good one’s worth investing.
Also read: Penny stocks: Risks and rewards of investing in low market cap shares
Few things to keep in mind while researching would be:
Previous performances: It is an important parameter to judge a company by. A careful study of how the company has grown or its cash reserves could help in selecting the right stock to invest in.
History of the company: It is important to study the history of the company and gather information on things like pending patents or its funding rounds. Enough information on the company could ensure a robust growth trajectory.
Type of industry: Some industries and their operations are riskier than others, making those companies extremely volatile.
Advantages and disadvantages of trading in penny stocks
Advantages of trading in these stocks include that small balances and small accounts can also trade, low entry barriers, as stocks are very cheap, and profit can be made both on the way up and down.
Disadvantages of these stocks are that the companies are not really the best in quality, extremely risky, exposure to fraud and manipulation is high, and since it is a high-risk high-reward territory, it often seems to be doubtful.
Why are they risky?
These stocks are considered to be very high on risk value, though the necessary investment amount is significantly low. These stocks are focused solely on a business’s success or failure. Since they are not a part of broader exchanges, they do not have as much oversight and leave their investors with very little government protection.
If a listed banking company falters, there would be a greater chance of it receiving a government bailout than one of these penny stocks companies.
How to invest or trade in penny stocks?
To trade in penny stocks, one needs a share dealing account to buy shares. If the company gives dividends, it will pass on to the investor.
If going for an option contract, it is also possible to short penny stocks and earn profits if share prices fall, but that opens up an investor to unlimited losses as well.
The possibility of how rich one would get with penny stocks will only depend on the ability of an investor to research the companies he chooses to invest in, the market conditions, and a host of other things.
