New investors’ interests are always piqued at the term “penny stock investments.” The stock market and investing can seem out of reach to first-time investors, so it makes sense that you want a low-stakes investment to dip your toes in. In fact, they are. Penny stocks are a very easy way to get started in investing, and you don’t even need recommendations from the Motley Fool stock advisors.
In this article, we’ll dive into penny stocks, the benefits of investing in U.S. penny stocks, and tips for investing safely.
What Are Penny Stocks?
Penny stocks are low-price stocks that lack liquidity (their ability to be bought or sold with minimum impact on the stock price) that typically trade for less than $5 per share.
This low price comes with another type of cost, though—these stocks are generally shares of troubled companies with minimal market capitalizations. These companies aren’t typically listed on major market exchanges. This means they’re traded via over-the-counter (also listed as OTC) transactions or on the OTC Bulletin Board system.
Penny stocks are an affordable way to introduce yourself to the market and begin investing. If you play your cards right, penny stocks may actually be a better fit for you than you’d think!
You do not need a large account to trade penny stocks. Other accounts, such as margin accounts, can require you to put down a minimum balance. Sometimes, these can be $2,000, sometimes, hundreds of thousands of dollars–it depends on the account.
Penny stocks are priced on the low-end already, so they do not require a minimum balance. This means you don’t need a lot of money to get started.
Additionally, you don’t need the aid of a broker or any certification to trade these stocks. All you need is an internet connection and a brokerage account, making it very easy to get started whenever you’re ready.
While there is a lack of regulation for penny stock exchanges, if you pay attention and do your research, this can work to your advantage. By taking the time to research the companies, you can evaluate whether or not they’re a sound investment and reap the rewards others may have hastily overlooked.
How to Invest Safely
Penny stocks have a bit of a murky reputation. Due to their low prices, they are very attractive to naive investors and have much less regulation than companies trading in large national exchanges.
These stocks are often involved in scams and fraud, like the ones centered in the plot of “The Wolf of Wall Street.” This is the worst-case scenario, but in less sinister situations, these stocks don’t grow into much (or any) capital for investors.
Both of the above scenarios are not the only two outcomes for investing in penny stocks, though. Here are some tips and tricks to invest safely, avoid fraud and scams, and maximize your trades:
- Research: It can be tricky to find reliable knowledge on most penny stocks, but some companies that were traded on major exchanges will fall under the $5 threshold. Look out for those opportunities, as you’ll find more information available for those companies.
- Budget: Decide how much money you’re willing to spend and lose. No one likes to talk about losses, but these stocks are volatile. Set aside an amount and don’t funnel your entire savings into these stocks.
- Focus on major exchanges: Many penny stocks can actually be found on big exchanges like the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotations (NASDAQ). This will lower your chances of investing in a fraud or pump-and-dump scheme. These stocks also offer more liquidity than the OTC market.
In a Nutshell
Penny stocks are an easy, low-cost way to debut into the world of buying and trading stocks. However, due to their accessibility and overall lack of regulation, they are prone to scams and fraud. Do your research, stick to a budget, and trade through major exchanges to avoid scams.
Want more expert tips and tricks, including the benefits of investing in dividend stocks? Check out our latest posts!