Penny Stocks

By now, you should have at least some money invested in large company stocks. Now, we will look at investing in smaller companies with share prices under $5 per share. These companies are commonly called penny stocks, because the share prices are so low.

Penny stocks work like any other stock, except that penny stocks tend to be more volatile and more risky than stocks of larger companies. That is because penny stocks are usually shares of small companies that most people have never heard of. They can also be companies that were once very large, but have since collapsed and are worth a tiny fraction of what they used to be.

Pros of penny stocks.  If a young startup company is going to become the next big thing, you want to get in on it early. Every penny stock investor dreams of investing in the next IBM, or the next Coca-Cola. And even if you prefer trading over long term investing, penny stocks can jump for huge gains in a short period. It is fairly common for a penny stock to jump 20-30% in a day.

Cons of penny stocks. Penny stock investing is not for the faint of heart. Just as penny stocks can jump up a lot in a day or two, they can also crash dramatically just as quickly. Every penny stock investor, myself included, can tell you a story of a penny stock that broke down and dropped 20% or more in a day. Bad times like this can cost hundreds or even thousands of dollars.

Furthermore, because small companies have little to no history, they are harder to research than large companies. That makes it hard to decide if the company is a wise investment or not.

Penny stocks can be bought at the same place you buy any other stock. The major point is to only invest what you can afford to lose, because there is a good chance that you will. With good, solid research, you can find some big winners, but many small companies are small for a reason. Only devote a tiny portion of your portfolio to penny stocks, and don’t risk money that you will need for something important.