Penny Stocks: Pros, Cons, Features and Best Approach to This High Risk / Reward Investment
Last Updated on 2 years ago by Antony C.
Penny stocks can be an exciting way to invest. These low-priced shares often trade for less than $1 each. Penny stocks offer the chance for big gains, but also come with high risks.
You might have heard stories of people getting rich quick with penny stocks. While this can happen, it’s not common. These stocks are very risky. The companies are often new or struggling. But if you’re careful, penny stocks can be part of your investing plan.
Before you buy penny stocks, learn the basics. Know how to spot good ones. Be ready for big price swings. With some know-how, you can make smart choices about penny stocks.
KEY TAKEAWAYS
- Penny stocks are cheap shares that can bring big gains or losses
- You need to be careful and do research before buying penny stocks
- Learning about penny stocks can help you make better investing choices
What Is a Penny Stock?
Penny stocks are low-priced shares of small companies. They’re known for their high risk and potential for big rewards.
These stocks aren’t always traded on big exchanges like the NYSE. Instead, you’ll find them on over-the-counter (OTC) markets.
Definition of a Penny Stock in General
Penny stocks by definition are stocks that is traded at the value of pennies or by cents, in other words, it refers to stocks traded at a “very low” price. Penny stocks are traded from new or struggling companies where each share are trade for less than $1 per share.
Penny stocks can be hard to buy and sell as not many people trade them, so prices can fluctuate greatly when traded. These investment have a much higher risk, as they are relatively illiquid and you might not be able to sell when you want to.
Companies with penny stocks don’t always share much info. This can make it tough to know if they’re a good buy.
Definition of a Penny Stock in Singapore
In Singapore, penny stocks work a bit differently. While you can buy many of these penny stocks on the Singapore Stock Exchange, the definition of these companies are defined as,
- Shares that cost less than 20 cents each.
- Total market capitalization of the company is usually under $10 million.
Singapore’s penny stocks face the same challenges as others. They can be hard to trade and risky to buy. But some investors still like them for their low price and chance of big gains.
Definition of a Penny Stock in United States
The U.S. Securities and Exchange Commission (SEC) have their own definition on what is called a penny stock,
- Stocks with shares under $5 are consider penny stocks, this is a change from the old rule of $1 or less.
Most U.S. penny stocks trade on OTC markets. Some are on the NASDAQ, but that’s rare. The SEC keeps an eye on these stocks to protect investors.
U.S. penny stocks can be from any kind of company. Some are new tech firms. Others are old businesses trying to bounce back. Like all penny stocks, they’re risky but could pay off big.
Characteristics and Features of a Penny Stock
Penny stocks have unique traits that set them apart from other investments. Let’s explore what makes these stocks so attractive to traders both beginner and experienced.
- Low Price Point: You can snag these shares for just a few dollars or less. In the U.S., penny stocks typically trade under $5.
- Small Market Cap: These companies are often tiny. Their total value might be under $300 million.
- High Volatility: Buckle up! Penny stock prices can swing wildly in a single day.
- OTC Trading: Many trade on over-the-counter markets instead of big exchanges. This can make buying and selling trickier.
- Limited Information: You might struggle to find solid data on these companies. They often don’t have to share as much as larger firms.
- Speculative Nature: Investing in penny stocks is like betting on a long shot. The rewards can be big, but so can the risks.
- Low Liquidity: Selling your shares quickly can be tough. There might not be many buyers when you want out.
- Pink Sheets: Some penny stocks trade on these less regulated markets. Extra caution is needed here!
Just a word of warning, while penny stocks can be exciting, they’re not for everyone. Always do your homework and only invest what you can afford to lose.
Pros and Cons of Trading Penny Stocks
Trading penny stocks can be exciting, but it’s important to understand the risks and rewards. Let’s explore the ups and downs of this investment strategy.
Pros of Penny Stocks
- Low entry cost: You can start trading with a small amount of money.
- High growth potential: Some penny stocks can see massive gains in a short time.
- Chance to invest in emerging companies: You might discover the next big thing.
Cons of Penny Stocks
- High risk: Penny stocks are very volatile and can lose value quickly.
- Limited information: Many penny stock companies don’t share much financial data.
- Potential for fraud: Pump-and-dump schemes are common in penny stocks.
- Low liquidity: It can be hard to sell your shares when you want to.
How Do You Buy Penny Stocks?
Want to start trading penny stocks? It is actually pretty simple, and if you know how to invest in regular stocks, it is almost the same process. Here are the steps:
- Open a brokerage account with a reputable MAS Licensed broker.
- Fund your account with money you can afford to lose.
- Research penny stocks by looking at: Company financials, Fundamental analysis, Technical analysis and Charting, News and press releases.
- Choose a penny stock that fits your strategy.
- Place a buy order through your broker’s platform.
Remember to start small. Don’t invest more than you can afford to lose in these risky stocks, and getting started with a reputable brokerage is probably one of the most important thing that is within your control.
There are a few which I find to be the best fit for me when I invest, and you can take a look to see if it fits your needs.
PS. Penny Stock Broker Rating is specifically rated for penny stocks and will differ from other ratings.
Considerations Before Trading Penny Stocks
Before jumping into buying a penny stocks because of it’s potential high reward, ask yourself,
“Are you ready for the rollercoaster ride of penny stocks?”
Why?
Penny stocks are consider extremely high risk, before you start trading, here are some things to take note:
- Remember to do your homework and research the companies thoroughly.
- Don’t rely on tips from strangers or flashy promotions especially from so-call investment gurus (me included).
- Stay cautious and only invest what you can afford to lose.
- Use only reputable brokerage to invest.
- Never borrow to invest, because get-rich-quick is a LIE.
While some traders strike it rich, many others face big losses or even bankruptcy.
If you just started investing, considered safer alternatives.
- Blue-chip stocks or REITs for those who want more control on your investment.
- Index funds can be a great choice for those who do not have time to do much research, but want to invest.
However, if you still decided to trade penny stocks, only start small and learn as you go. Keep a close eye on your investments and be prepared to act fast if things go south.
Here are somethings you can do to protect yourself even further:
- Set a stop-loss order to limit potential losses. This automatically sells your shares if the price drops to a certain level protecting your from further loss.
- Keep an eye on your investments. Penny stocks can be volatile, huge price fluctuation can change by days or even minutes, so stay informed about company news and market trends.
- Be cautious of scams. Check if the company is registered with the Securities and Exchange Commission before investing.
I know I am being long-winded, but I need to say this again, “Never Borrow to Invest”, do not use margin for investing, it is probably one of the most dangerous way to invest.
Penny stock is extremely risky, but it also offers massive reward, with careful research and smart strategies, you may do well in this market.
I personally use Moomoo for most of my investment, and if you are looking for a brokerage to get started, you can take a look, they are offering pretty nice promotion for new user right now.
- Claim up to S$1,200* worth of Free Stocks + Trading Option Gifts + Exclusive Bonus.
- Earn a return on idle cash with Moomoo Cash Plus
- Low commission fee for SG & HK stocks, ETFs & options.
- Lifetime $0 commission free* for US stocks.
Moomoo Promo: Low Commission + Free Stock
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Antony C. is a Singaporean dividend investor focused on building passive income through REITs, ETFs, and Dividend Stocks. With 15+ years of experience investing in Singapore, Hong Kong, and China markets, he founded IncomeBuddies.com to share practical wealth-building strategies tested in his own portfolio since 2008. His expertise has been featured in Yahoo Finance, Nasdaq, and NFAA, and he’s the published book author of "Start Small, Dream Big".