Penny stocks

Aug 9, 2022

All about penny stocks

What are penny stocks 

Penny stock, in literal sense is a stock who’s value is less than one dollar. But this segment also includes stocks priced under $5. Penny stocks are those that have low trade value and  low market capitalization, are mostly illiquid, usually listed on a smaller stock exchange. Penny stocks in the Indian market can have prices below 10 Rupees.

Risk involved 

Penny stocks offered on the marketplace are often small companies which are looking to grow with limited capital and resources. Thus, penny stocks are most suitable for investors who have a high risk  tolerance.

Typically, penny stocks have a higher level of volatility, thus, a higher potential for reward and, therefore, a higher level of inherent risk. There is a chance that an investor loses their entire investment amount on a penny stock, or even more than their investment if they buy on option, which means the investor borrowing funds from a bank or a broker to purchase the shares.

Considering the risk levels associated with penny stocks, investors should take some  precautions. For instance, an investor should have a stop-loss order predetermined before entering a trade and know what price level to exit if the market moves in the opposite direction. Stop-loss can set a price limit for that order, and once on reaching the limit, it will trigger an automatic sale of the securities.

Although penny stocks can have exponential gains, it is important to have realistic expectations and understand that penny stocks are very high-risk investments with very low trading volumes. 

Penny stocks do provide some small businesses a way to get funding from the public. These companies may use the platform as a starting block to upgrade into a larger marketplace. Also, since they sell at a low price, there is room for significant growth. However, some factors exacerbate the risk associated with investing or trading penny stocks. Securities are usually riskier than more established companies.

A blue chip is a nationally known, well-established, and financially sound company. They generally sell high-value, widely accepted products and services. 

Transparency to the public 

When considering options for potential investments, it’s important to have some information to make an informed and calculated decision. For some penny stocks, information on companies’ performance can be difficult to find. When this is the case, the information that is available about them may not come from credible sources.

History 

Many of the companies considered to be penny stocks usually are newly formed, and some could be approaching bankruptcy. These companies will generally have poor track records or no track record at all. As you can imagine, this lack of historical information makes it difficult to determine a stock’s potential.

Penny Frauds 

Stocks that aren’t traded frequently do not have liquidity. As a result, it is possible that investors can’t sell the stock once it is acquired. Sometimes the investors need to lower their price for it to be considered attractive and bear losses.

Low liquidity levels also allow opportunities for traders to manipulate stock prices. Large amounts of a penny stock are purchased followed by a period when the stock is hyped up or pumped up. The pump and dump scheme is a popular trading scam to lure investors into buying a stock. other investors get lured to buy the stock, the scammers sell their shares. 

How to make a penny 

Small companies and startups typically issue stock as a means of raising capital to grow the business. Although the process is lengthy, issuing stock is often one of the quickest and most effective ways for a startup company to obtain capital.

A penny stock are created through IPO (initial public offering). To be listed on the OTCBB the company must first do the registration statement with the SEC or file stating the offering qualifies for an exemption from registration. It must also check state securities laws in the locations it plans to sell the stock. Once approved, the company can begin the process of giving out orders from investors.

After this, the company can apply to have the stock listed on a larger exchange, or it can trade on the over-the-counter market.

Pros 

  • Offers small companies to gain access to public funding.
  • In some cases, penny stocks can provide a method to gain access to larger market listings.
  • Because of a lower price, penny stocks allow for significant growth in capital appreciation.

Cons 

  • lacks a liquid market with not many buyers, even after their price has increased.
  • There is limited or no information available on the company’s financial performance.
  • Penny stocks have a high chance and a lot of history of fraud and bankruptcy of the underlying company.

Conclusion 

You can look at other investment options for a safer opportunity. Like P2P.

To save you the trouble you can choose to invest in Peer to peer platforms like LenDenclub where you can still get consistent high returns* on investment allocation done by AI. A P2P model involves diversification of your fund into several small loans to mitigate risk. 

You can register now on LenDenClub

*P2P investment is subject to risks. And investment decisions taken by a lender on the basis of this information are at the discretion of the lender, and LenDenClub does not guarantee that the loan amount will be recovered from the borrower.

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