Why You Should Rethink Investing in Penny Stocks

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In recent weeks, over-the-counter trading in penny stocks has seen a rocket-high surge owing to the rampant speculation by retail investors, who now favor riskier investing using smaller dollar amounts.

What are Penny Stocks?

Although penny stocks do not list on major exchanges, you can trade in Penny Stocks on Cashapp, an over-the-counter trading platform.

Penny Stocks are high-risk, speculative investments with very low valuations. In the past, they cost pennies at less than $1 per share. But now they cost as high as $5 each. Some could be outright fraudulent, with companies behind them, often in financial trouble, and in some cases, even no real business. But some could present a golden opportunity too.

The High Price Volatility of Penny Stocks

Penny stocks have low prices, and a slight move in the share price can result in a significant percentage gain. For instance, a price fluctuation from $0.50 to $1.00 might appear insignificant, but it’s a 100% gain in the stock price. However, the share price might drop significantly simultaneously, sometimes leading to a considerable percentage loss.

Here’s a quick guide to buying Penny stocks.

  • Decide how much you’re willing to risk. Penny stocks are also highly volatile but potentially lucrative, so you should not put the bulk of your savings into investing in this market.
  • Do your research to make an informed investing decision. Reliable information on penny stocks may be elusive. However, you can look for stocks that trade on major exchanges but have recently dropped below the $5 threshold.
  • Be conservative with transaction fees. Use platforms that charge you a low commission to maximize your potential return on investment.

Penny Stocks Outperformed High-Dollar Stocks in Recent Weeks

While the top 29 highest-priced shares in the Russel 2000 futures grew by a mere 4%, penny stocks outperformed the high-priced stocks by 75%, according to Citadel Securities’ data.

Penny stocks trading below $1 each has an average gain of nearly 80% as economic conditions continue to improve and sharply rebound from their March lows.

As a result, retail investors are snatching every opportunity, with rampant speculations of better performance of some failing companies.

While some speculative investors are buying into companies affected by the pandemic, such as airlines and cruise operators, others are eyeing bankrupt companies like J.C. Penney, Hertz, Palatin Technologies, and Denbury Resources, which are trading below $1 per share.

Investing in Stocks: How Women Should Manage Their Finance

There are different stocks you can invest in, with varying degrees of risk. A favorable investment portfolio should ideally have different types of stocks. These include:

  • Blue-Chip Stocks

Established companies with a history of steady and reliable performance make up the blue-chip stocks and are a safe investment option. Apart from having a consistent dividend payout, they are low-risk, but they are highly priced too.

  • Dividend Stocks

The value of dividend stocks appreciates over time while earning you a steady income stream. Buying the shares of a public company entitles you to other benefits, such as voting rights and tax benefits, when you sell them after one year.

  • Value Stocks

The stock market may undervalue some strong companies based on broader market forces rather than the specific performance of their businesses or industries. You can look out for stocks with a low price-to-book ratio, buy and wait for the market to discover their actual value, and sell to make a profit.

  • Green-chip Stocks

Green stocks are the shares of companies that exhibit environmentally sustainable activities while at the same time encouraging diversity and good corporate governance. Investing in green stocks in the long-term is best, as it takes time to realize the high potential returns.

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