Investing in Penny Stocks: Pros & Cons

No matter where you choose to invest your money in, there will always be pros and cons. Penny stocks are no exception. The most obvious benefit to investing in penny stocks is their ability for higher investment gains, while significant risks include their extremely volatile nature. Here are common pros and cons to investing in penny stocks.

Pros To Penny Stock Investments

What makes penny stocks so attractive to investors is that they have a much higher growth rate and potential than stocks from large cap companies like Google or Microsoft. By investing in a company early on, your return on investment has the potential to skyrocket if the company continues to increase its profits and stock price.

Penny stocks can typically be purchased as low as $5 per share which makes them attractive to new investors. Rather than investing in a single company you have the option to invest in multiple companies, thereby increasing your chances of making significant profits. The low prices for penny stocks also give you the opportunity to invest in a company without losing a significant amount of money.

Another benefit of penny stocks is the ability to purchase more shares of the same company. If a stock is valued at $5 and you have $100 to invest, you can easily purchase 20 shares (not including broker fees) and sell them at a later date for higher profits if the stock price increases.

Cons To Penny Stock Investments

While penny stocks may very well have the potential to make you a millionaire by the time you retire, they also come with significant risks. Penny stocks are extremely volatile and it is very common for stocks to increase significantly in one day while dropping completely in half the next. While you can never really lose money on a stock until you sell it, it can still be disheartening to see the stock you purchased drop the very next day.

Due to low trading volumes of penny stocks, it is very possible that an investor might not find a buyer for their shares. While these occurrences are rare, you can risk losing an entire investment if you can't find any buyers or if the company declares bankruptcy.

Another risk of buying penny stocks is that most of the companies selling these are typically startup companies so they may lack financial history. This makes it difficult to determine whether the company is a good investment.

While fraud rarely happens within the stock trading industry, it is very possible for traders to manipulate stock prices by purchasing large amounts of stock thus increasing the share prices. A company may do this to convince other investors to buy.

So Should I Stay Away From Penny Stocks?

Penny stocks are definitely a high risk investment but they can also prove to be extremely profitable. While penny stocks are risky by nature, choosing not to invest in them isn't exactly the best choice either as you will leave a lot of money on the table. One of the most important things to do to minimize risk is to do proper research into the company you are interested in investing in.

This includes finding out everything you can about the company including how much profit they made in prior years, what competitive advantage they have over similar businesses, and who their board of directors are. While penny stocks can be a risky investment, they should still be seriously considered for anyone's portfolio.