Penny stocks are the stocks that, by definition, trade at less than $5 per share. They belong to small-cap public companies, are illiquid, and are traded on the over-the-counter exchanges and not the regular stock exchanges.
Penny stocks are highly speculative in nature and hold high-risk high-reward potential. If the trade works in investors’ favor, they can generate high returns by investing only a small amount of capital. On the other hand, due to the small capital required to buy penny stocks and lack of public disclosure of information, they are also subject to many frauds and risks.
Factors to Consider Before Investing in Penny Stocks
The general rule of diversification does not work with penny stocks. Investors must not include a large number of penny stocks in their portfolios. Instead, investing a small share of the capital in just a handful of penny stocks is enough.
Additionally, the professional tips and advice regarding penny stocks, available at various financial portals, should be avoided. Many fraudsters use penny stocks for their pump and dump strategy, create fake news, take the price of penny stocks temporarily up, and then dump large volumes of their penny stocks in the market at high prices. It can cause huge losses to naive investors.
Investors must also consider the volume and liquidity before investing in penny stocks. Also, the volume must be carefully analyzed through fundamental and technical indicators to make sure that it is the organic trading volume of the penny stocks, and the company is fundamentally strong.
Which Penny Stocks Should I Buy?
Investing in penny stocks is similar to stepping in a minefield! It is highly risky and can cause the entire investment to be swept away, if not done carefully. Therefore, we have compiled a list of the top penny stocks based on the market capitalization of the companies, their P/E ratios, and sales growth in the past five years.
The low price and the potential dreams of huge profits should not lure investors into buying penny stocks. Investors should always weigh the associated risks and invest only in the stock of companies that have demonstrated strong financials and high value, historically.