You may have heard the term “penny stocks” thrown around now and then, along with plans to “get rich quick.” However, if you’re anything like me, you know little about penny stocks, let alone how they could possibly make a person rich. After a lot of research, I’ve decided to break down what I’ve found. You can determine whether penny stocks are, in fact, worth your investment.
What’s a Penny Stock?
First thing’s first—let’s define the penny stock. According to Jonas Emerralji, writer for thestreet.com, penny stocks are just low-cost stocks. “Contrary to their name, penny stocks rarely cost a penny. The SEC [Securities and Exchange Committee] considers a penny stock to be pretty much anything under $5. And while there are sub $5 stocks trading on big exchanges like NYSE and NASDAQ, most investors don’t think of these when asked to describe a penny stock.”
In other words, penny stocks are more of the investments made in the untapped portion of the exchange. These stocks haven’t received tons of media attention and are therefore cheaper. However, this also makes them riskier. People who invest in penny stocks may be in for some unpredictable twists and turns.
Are They Worth it?
It depends. Rarely does a penny stock becomes the next big thing; however, it is easier to turn an increased profit when investing in a smaller stock. Think roulette via stock exchange—sometimes the ball lands on red, sometimes not. So, if you do your research, penny stocks could pay off in the short term.
Often a penny stock will throw investors through a loop, never being fully predictable. But this can also be some of the thrill that comes from “playing the pennies.” Because of their often-tumultuous life, investors in penny stocks need to be in the know constantly.
Take it from successful penny stock investor, Tim Grittani. In an interview with CNN Grittani said, “I’ve been trading every single day for almost three years, and it’s been a slow, day-to-day process.” Grittani has a portfolio worth more than $1 million, which he has earned by playing the penny stocks. He goes on to note that this style of investing isn’t for everyone, and the longest he’ll hold onto a stock is for a few days, often trading them within minutes of purchase.
Grittani is proof that successful penny stock investment can work, when accompanied by dedicated research and quick action. However, it’s not free of potential downfalls.
What About the Risks?
Just like roulette, there’s always risk when taking a gamble. According to the SEC, some investors may be stuck at the end of the day with worthless stocks. “Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Because it may be difficult to find quotations for certain penny stocks, they may be impossible to accurately price.”
Companies with penny stocks are also under far fewer regulation standards for investors, which means they are a breeding ground for dishonest individuals looking to scam people out of a few bucks. Thus, the SEC is required to share a disclaimer of the risk of investment every time a penny stock is purchased.
So, Are They Really Worth it?
Again, it depends. Is the potential for high reward worth the risk of disaster? If so, this may be the monetary adrenaline rush you’re seeking. If you prefer a more conservative approach, stick with standard investment.
With or without penny stocks, it’s important to remain responsible with your assets. If you have the room to play a little, perhaps dabbling in penny stocks would be worth your time. If the budget is tight, however, it’s best to be smarter with your investments.
Have you ever invested in penny stocks? What was your experience like? We’d love to hear some of your pros and cons in the comments!