If you are someone who has invested your money in the stock market, or is planning to invest, you must be aware of the different opportunities that you might have come across with respect to the kind of investment you choose to make in the stock. As we all are aware of the fact that the stock market is extremely unpredictable and volatile and the stock market can go up and down according to the economical situations and decisions that are made on the daily. This makes variations in the type of stocks that you are investing in as different kinds of stocks react differently when it comes to the outcomes. One of the type of volatile stocks are the penny stocks that attract a lot of investors and in this article you will learn about them with the pros and cons of penny stocks.
So, let us first understand what are penny stocks?
As the word “penny” suggests, penny stocks are the stocks that are the shares of the small public companies and the penny stock can even cause you as less as Rs.10 and this is stock deals with the low amounts that turn higher as the market dynamic changes. Since the amount is very small, a lot of investors are into this kind of trading and the market is known to be extremely volatile where there are no predictions which can be made for these. The entire portfolio and market position stands on the concept of market capitalization which affects the small public companies. The small cap stocks are based totally on how the company’s position is on that particular day and when the market closes, it is difficult to predict its position on the next day.
Since it is a small amount, a lot of investors trade in this and end up profiting through investing small amounts and if there is a loss, it isn’t much as the amount was very low. Still there are a lot of pros and cons associated with the penny stocks.
Let us have a look at some of the pros of investing in penny stocks:
- Low price: The price of the penny stocks is very low so they are worth the investment as there is an opportunity to take a risk that you wouldn’t have done in case of any other kind of stocks. You can also buy a lot of stocks with the low amount and make investments in a diverse portfolio so that you have the safety of your stock where you won’t even face a higher amount of loss.
- Returns: Since the amount is low and you have the opportunity to invest in diverse portfolios, you are getting the benefit of diversification where you can get multiple returns and all can be high and profitable. This is a great way to increase your capital as you are getting several chances to invest without facing huge losses.
- Less risk: The volatility of the penny stocks market is of a short term as the penny stocks provide a way in which the capital is in a more volatile environment but that also means that there are more chances of growth in the trading process. Even with small amount of investments, a lot of profit can be generated and this helps you to start small and make it big. A lot of experts advise people who are stating their journey of making investments in the stock market, to start with the penny stocks as it is the way to understand the volatility of the market and how to make a perfect use out of it.
These were some of the pros of investing in penny stocks, to understand them completely, we will have to look at the cons of investing in penny stocks:
- Not much information: When it comes to penny stocks, they are owned by small companies so there is hardly any information related to the aspects of growth and this is one of the major drawbacks since there are no proper ways in which there is a suitable financial checking possible that leads to unpredictable decline or rise in the stocks.
- Scams: Since there are small companies in penny stocks, there are a lot of chances in which scams can happen to a lot of people as there are a lot of common scams that are known to happen with the penny stocks where the companies just associate penny stocks to inflate the prices and then exploit the investors.
- No liquidity: When it comes of penny stocks, there is a very less popularity that comes with it and it results in poor liquidity as there are less potential buyers of the stocks. The penny stock market is not much active as the other stock markets.
So, here were some of the pros and cons of penny stocks, do your research well and invest smartly!