Everything You Need to Know Before Investing in Penny Stocks

By  //  March 17, 2022

Investing can be one of the most successful financial ventures you can do. However, it also comes with its fair share of risks. Investors who are just starting out need to be wary of how they choose to invest. Crypto, EFTs, and bonds aren’t bad choices, but one of the best tips for beginners is to get some experience in the field first.

One of the best ways to get the experience you need to become an avid investor is dabbling in penny stocks. Here’s everything you need to know before investing in penny stocks.

What Are Penny Stocks?

Don’t let the name fool you; penny stocks don’t cost a one cent. They’re only called that because they’re the least expensive type of stock you can purchase. Their actual worth ranges from $1 to no more than $5. Because of the low price, you might think that these are low-risk investments. However, this isn’t the case as they’re actually considered high-risk investments. We’ll go into more detail about this in a bit. 

The thing about these particular stocks is that you don’t purchase and invest in them overtime, like a regular stock. Instead, penny stocks are the main component of a venture called day trading. Day trading is when you buy these stocks and sell them within 24 hours. Day trading is beginner-friendly as it introduces you to various key strategies. It’s in your best interest to look online to find good penny stocks to invest in, so you won’t have as much risk and help you have a better understanding of how the process works.

Why They Are High-Risk

Now that you know what these stocks are and what they’re used for, it’s time to dive into if you are ready and why they’re high-risk. For starters, their liquidity is incredibly low. In the world of investing, liquid is a term used to describe how easy it is to convert an asset into cash.

Unlike a traditional stock, where you sign a contract called a stock purchase agreement (SPA), penny stocks have next to financial security. 

This is because they’re purchased over the counter, so to speak. You can get them at any time with hardly any difficulty. Traditional stocks are typically a part of an established company, so you have background information on them while penny stocks usually don’t. Besides, and perhaps the most detrimental aspect, these stocks have an increased chance of being a part of a scam. They’re highly manipulatable, which adds to the security risk.

The Takeaway

Long story short, penny stocks, day trading, and buying shares on the exchange in general for that matter, can become a lucrative investment for beginners. But they require extensive research and plenty of thought. You also need to know how and where to choose the best penny stocks.

Hiring a financial advisor is a fantastic idea as they can give you advice on how to go about things and keep you from making a mistake. Investing, no matter what it is, is always going to be risky.