One of the first stock investing tips is to invest only what you can afford to lose. And for many of us who would like to get into stock investing (outside of our retirement accounts), it seems as though a stock investment or two would cost too much.
Not when it comes to penny stocks, though. Investing in penny stocks can be a good introduction to stock investing, and they can make a profitable addition to your stock portfolio.
What are penny stocks?
Penny stocks are just what they sound like: stock shares that sell for a very small amount per share. Generally, anything that sells for less than $5 per share is considered a penny stock. And there are penny stocks that sell for much less. You can see where attraction for beginning investors (and even for some seasoned investors) lies. You can purchase many more shares for much less.
Advantages of investing in penny stocks
Having penny stocks in your stock portfolio can be a great advantage. The capitalization is high, especially when you get in at a god price. Imagine: In early 2004 Sun Microsystems was a penny stock. By the end of the year, it was trading at nearly $6 per share, and had a capitalization of more than $18 billion. You can tap into that in a bigger way when the penny stocks in question grow more. With a small amount of money, you can make a great deal in a stock investment if you are careful and stick to penny stocks.
Penny stock investing pitfalls
The main thing you need to watch out for when investing in penny stocks is that you choose a solid company. Sometimes there is a reason, other than undervaluation or being undiscovered, that a penny stock is so cheap. New, unknown companies are often penny stocks. So, do your homework. You could lose money on penny stocks if you choose one from a company that is less than solid.
Penny stock prices do fluctuate quite frequently, so it is important to keep an eye on them. And to not buy too many shares. It is possible to hold hundreds of thousands of stock shares in penny stocks, and that can destroy the liquidity of your situation. Keep the shares held in a company in the hundreds, and make sure that you will be able to sell them.
Penny stocks can be interesting to trade, and they can be a good start for investors. However, make sure you limit your purchases of stock shares, and that you research companies well. Because, like all stock investments, penny stocks carry risk, and you could lose money as well as gain it.