Penny Stocks: Everything you need to know

Penny Stocks: Everything you need to know

Penny Stocks: Hot or not?

Are you ready to uncover the world of penny stocks and discover whether they hold the key to your financial success? If you've ever wondered what these mysterious investments are all about, then this blog post is your ultimate guide. We'll delve into the fascinating realm of penny stocks, exploring their potential for sky-high returns and their inherent risks. So, fasten your seatbelt as we embark on a thrilling journey through the world of low-priced securities – it's time to find out if penny stocks are truly a hidden gem or just fool's gold!

In a hurry? read our quick guide
  • According to the most common financial dictionaries, we are talking about “very low value shares, usually less than $5 in the US and £1 in Europe, representing companies with very small capitalization”.
  • The features of Penny Stocks are numerous. For example, they are the source of much speculation, have little liquidity and therefore high price volatility
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Ready to find out all about Penny Stocks? Read on!

Definition and main characteristics of Penny Stocks

In this article we will talk about Penny Stocks. Most likely you have already heard this term, perhaps in some film with an economic-financial background. 

For example, do you remember the movie “The Wolf of Wall Street”? in first place in our ranking of finance films to see ? In particular, the scene in which DiCaprio tries to persuade a customer on the phone.

At that juncture, he was trying to sell Penny Stocks .

Below we will explain what they are in more detail, and what you need to know today about this financial instrument.

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Definition

According to the most common financial dictionaries, we are talking about “ very low value shares , usually less than $5 in the US and £1 in Europe, representing very small capitalization companies .”

However, why are these small actions so important?

In reality, they have quite unique characteristics, which can be to our advantage, but also present great risks.

To be listed on the New York Stock Exchange, a company must meet specific requirements. For example, it must have enough trading volumes, therefore high liquidity, or it must have a certain capitalization.

One of the basic requirements is that the value of a single share must be at least $4.

Therefore, if a company does not meet these priorities, it is downgraded in the OTC (Over the Counter) market.

This is an unregulated market, and the shares listed on this exchange are called Penny Stocks.

Singular features

Of course, it is not enough to define companies with very low share prices as penny stocks. For example, there may be companies with a share value of less than $5, but with a fairly large capitalization.

In fact, there are other features to take into consideration.

One of these is liquidity. In fact, Penny Stocks have very low daily trading volumes , therefore low liquidity. This means that price volatility can be extremely high , resulting in big gains as well as big losses of money.

Therefore, with such low volumes it is also easy to speculate on the title , and easily arbitrate the price. 

Another feature, as mentioned before, concerns the OTC market. Being an unregulated market, there is no so-called “clearing house” , which limits counterparty risk.

Furthermore, not being able to find much information on them, it will be difficult to build a clear picture of the company . In fact, very few institutions will be interested in them, effectively limiting their exponential growth.

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Because Penny Stocks are the object of attention

Despite not having a great value, many investors are attracted to Penny Stocks.

The reason may relate to various factors, the attraction may depend for example on the fact that they have very low prices.

In fact, it is often thought that the lower a price is, the higher the chances of doubling the price. This is a very common mistake.

Nonetheless, some Penny Stocks can show 3-400% growth, even in just one year. 

This means that an investor can decide to invest part of the capital even in a small company, still little known.

However, we must consider the fact that, since there is little information on the companies in question, it is unlikely that institutional officials will intervene. As we know, without large sums of money invested by the latter there will never be capital and price growth.

Therefore, the probability of exponential growth occurring is very low.

Penny Stocks: conclusion

At this point, how can we consider the Penny Stocks from a stock market point of view? A good or bad investment?

Of course, there is no single answer. In fact, you will find investors who will speak well of them, while others will consider them as absolute evil.

Certainly it is difficult to predict the future of companies with little capital, unless you have personal acquaintances within the company itself.

Therefore, the answer depends on the type of investment that everyone decides to undertake , and also on the character profile .

In fact, if you lean towards more relaxed investments, with low risk and constant profits, Penny Stocks will be avoided.

Conversely, if you're a daredevil investor who likes big price moves in your portfolio, they're a great investment.

The most important thing is to define an optimal investment strategy, and stick to it.

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Investing for Beginners: FAQ

How should a beginner start investing?

A beginner should start investing by first setting clear financial goals. Are you saving for retirement, a down payment on a house, or your child's education? Once you have a goal, you need to understand your risk tolerance. This will help you determine the right mix of investments. Next, open an investment account. This could be a retirement account like a 401(k) or an IRA, a taxable brokerage account, or a robo-advisor account. Once you've funded your account, you can start picking your investments. It's generally recommended to start with a diversified portfolio, which could include a mix of stocks, bonds, and mutual funds.

Is $100 enough to start investing?

Yes, $100 is enough to start investing. Many online brokers and investing apps have no minimum investment requirement, or if they do, it's very low. You can invest in individual stocks, ETFs, or mutual funds. Another option is to use a robo-advisor, which will create a diversified portfolio for you based on your risk tolerance and investment goals.

How to invest $100 dollars to make $1,000?

Turning $100 into $1,000 through investing requires time and patience. One of the best strategies is to invest in a diversified portfolio of stocks and bonds and let compound interest do the work. If you invest $100 in a portfolio that earns an average annual return of 7%, it would take approximately 30 years for your investment to grow to $1,000. However, keep in mind that investing involves risk, and the actual return could be higher or lower.

How do I start investing with little money?

Starting to invest with little money is easier than ever thanks to technology. Many online brokers and investing apps allow you to start investing with as little as $1. You can buy fractional shares of stocks and ETFs, which means you can own a piece of a company or fund without having to buy a whole share. Another option is to use a robo-advisor, which will create a diversified portfolio for you based on your risk tolerance and investment goals. Finally, consider setting up automatic contributions to your investment account. Even a small amount each month can add up over time.

Risk Disclaimer

need to rewite There is a very high degree of risk involved in trading securities. With respect to margin-based foreign exchange trading, off-exchange derivatives, and cryptocurrencies, there is considerable exposure to risk, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or related instrument. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable, or that they will not result in losses.

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