Summary
- Penny stocks are priced below US$5 and are mostly associated with small companies.
- Penny stocks lower price point makes them attractive to investors looking for massive gains from low investments.
- However, with penny stocks, there are several risks associated, such as price volatility and lack of historical information.
Penny stocks mostly belong to small companies or startups that trade below US$5 apiece. Penny stocks gained popularity over time as many saw it means to make massive gains from small investments.
Most of these stocks are traded over the counter, while some trade on large stock exchanges, such as the New York Stock Exchange and the NASDAQ.
In most cases, penny stocks are issued by companies having small businesses and fewer assets. Some investors see penny stocks as the first step in getting into equity market investment because of the stocks low pricing point.
Why are penny stocks attractive?
Since penny stocks are priced at less than US$5 per share, a lot of people find them attractive and inexpensive. Investors, primarily the new ones with less money to invest and experience, find it easy to purchase more shares of a penny stock because of its low pricing.
Some companies or startups that issue penny stocks could potentially skyrocket over time and outperform mid-cap and large-cap stocks. Buying large volumes of such shares at a low rate can massive returns at times. Some of the blue-chip stocks such as Apple, Ford, AMD were once penny stocks years ago.
Also, some of the small and new companies issue penny stocks to raise capital for their business expansion and future operations. This provides them with an opportunity to seek public funding.
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Risks involved in penny stocks
There is an old saying: Great rewards often come with great risk. This could be right when it comes to investing in penny stocks.
Penny stocks are mostly issued by small companies and startups. The companies need not be dominant players in the market and have minimal assets. At times, there is a lack of buyers for penny stocks, making them less liquid than other types of stocks.
By purchasing penny stocks, you could be investing in small businesses that are yet to report profit and could take years to swap the losses. In some cases, there could be no guarantee that a company would be successful in the future and can escape bankruptcy.
Since many stocks are of new companies, there might not be enough information about the company’s performance and historical share price trend. In addition, it is important to note that public companies with less than US$10 million in assets need not file financial statements with regulators. Also, some of the penny stocks are not tracked by major analysts or investment banks.
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Some examples of penny stocks
Exela Technologies (NASDAQ: XELA) is a business process automation company that is listed on NASDAQ. The company has a market cap of US$154.5 million and its stock returned 95 percent year to date. The share price fluctuated between 99 cents to US$7.82 in the one-year period.
Aerpio Pharmaceuticals (NASDAQ: ARPO) is a biopharmaceutical company and its stocks trade on NASDAQ. The company has a market cap of US$99.2 billion. Its stock gained 111 percent this year and traded between 95.40 cents and US$3.32.
READ MORE: Aerpio Pharmaceuticals (ARPO): Trending healthcare penny stock
Borqs Technologies (NASDAQ: BRQS) is a Chinese technology company trading on NASDAQ. It has a market cap of US$100.5 million and its stock declined 17 percent year to date. The share price fluctuated between 78.10 cents and US$3.35 in the last one year.
Can you make a living from penny stock?
Some investors consider trading penny stocks as highly speculative. The price fluctuation and lack of history and market position make penny stocks risky at times. However, with careful research on the company’s operations and background, as well as on the risks associated, one could stand a chance to reap large gains from money-making penny stocks.
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Please note: The above constitutes a preliminary view, and any interest in stocks/cryptocurrencies should be evaluated further from an investment point of view.
The reference data in this article has been partly sourced from Refinitiv.
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