Introduction
Penny stocks refer to the common shares of small or emerging companies that trade at low price (under $5). The main features of penny stocks are:
* It attracts price conscious investors because of cheap price
* It is issued by new or struggling public companies
* It lacks liquidity. so it it difficult to sell or buy quickly
* Because of high volatility price of share fluctuates quickly
* These stocks are traded outside major exchanges
Pros Of Penny Stocks
The main advantages of penny stocks can be pointed out as follows:
1. Potential For Explosive Growth
One of the major advantages of penny stocks is high growth potential because small and newly established companies may grow rapidly that increases the value of their shares. So, investors may gain massive profits within a short period of time.
2. Accessibility
Because of low barrier to entry and affordability, it is accessible for wide range of investors. Investors can buy large number of shares because of low investment,
3. Suitable For Short-term Traders
Frequent price fluctuation creates opportunity for short-term traders because they can make quick profits from price swings.
4 Portfolio Diversification
It helps to add diversification to a portfolio as it can add variety.
5. Learning Opportunity For Beginners
It provides learning experience for new investors. They can learn about market movement, risk management skill and trading strategy.
Cons Of Penny Stocks
Major drawbacks or disadvantages of penny stocks are as follows:
1. Volatility And High Risk Of Loss
Penny stocks are unstable in nature and price fluctuates sharply within short period. It may lead to substantial losses to the investors.
2. Low Liquidity
Another notable drawback of penny stocks is lack of liquidity. It means it is difficult for the investors to sell shares at the price they want.
3. Lack Of Transparency And Information
Generally small and emerging companies do not provide reliable and detailed financial information that makes difficult to evaluate the financial health of the companies. So, it lacks transparency and reliability/
4. Possibility Of Scams And Fraud
Due to the lack of proper regulations promoters may inflate the price of share artificially to sell their shares. So, There is susceptibility of frauds and scams.
Final Thought: Are Penny Stocks Good Investment Option ?
Investing in penny stocks may be appealing because of low entry barriers and low price but it also involves high risk of loss. So, if you are risk-tolerant and can handle emotional stress it may be a suitable option for you. But if you cannot tolerate risk then it may not suit you. Although you can invest small portion in these stocks that helps to diversify your portfolio
