There are many different ways to invest your money. Unfortunately, many of those ways require large amounts of startup cash, which scares people away from investing altogether.
Just because many strategies require tens of thousands of dollars doesn’t mean they all do! Trading penny stocks only requires hundreds or a few thousand dollars, which makes it a great way to start investing.
Or is it?
What are penny stocks, and what are their pros and cons? Before you get started, it’s important to understand the risks so you can make wise investment choices.
Pros: You Can Start With a Small Amount of Cash
One of the best things about penny stocks is the fact that you can start with a relatively small amount of cash. You’ll need more than just a few dollars, but you won’t need the tens of thousands it takes to invest in the regular stock market.
Some get started with just a few hundred dollars, while the most successful penny stock investors start with one or two thousand. For many Americans without a lot of extra money to their name, it provides them with a way to get their foot in the investing door.
Pros: You Could Get Rich Quick
Not only can you invest with very little capital, you also have the potential to make a ton of money on just a little in very little time.
The traditional stock market can provide you with returns, but it means playing the long game. You aren’t likely to see very much in the way of gains for many years. That’s why many people invest in the stock market as a way to save for retirement.
That’s not the way the penny stock game works. Instead of waiting decades for a big return, you may only have to wait a few years or even a few months. That enables people to start with just over $1,000 and end up with over $1 million in just a few years.
Pros: It is Exciting
With very little startup cash needed and the potential for huge gains in very little time, it’s easy to see why people get excited about investing in penny stocks.
It’s also exciting because it gives you a chance to get in with new companies. It can be exciting to learn about companies that are just getting started, and it can be exciting to know you’re helping them succeed. Just imagine if you got in early trading penny stocks for Monster Beverage Corp. or Pier 1 Imports!
Cons: The Market is Volatile
Trading penny stocks isn’t all sunshine and roses. There are reasons why people avoid them, even if they are affordable.
It’s true that the market can go in your favor and you could basically become a millionaire overnight, but the opposite is also true. The market is very volatile, which means you could end up losing your money overnight too.
If you want to be successful in penny stocks, you cannot have a low risk tolerance. You also have to be dedicated to buying and selling them regularly. In order to get a good profit, you have to keep close tabs on your stocks so you can sell them if things look like they might go sour.
However, even that isn’t enough to save you in some situations. Because the market is so thin, you may not be able to find someone willing to buy your stock when you’re ready to sell. That may leave you with a large loss in the end no matter how much time you dedicate to your portfolio.
Cons: Fraud and Scams are Commonplace
It isn’t uncommon for penny stock traders to realize they’ve been had. Unlike the New York Stock Exchange, the American Stock exchange, and NASDAQ, penny stocks are not regulated. The companies do not have:
- Listing standards
- Reporting requirements
- Investor communication obligations
Because of this, companies flock to penny stocks in droves, and many of those companies and traders are fraudulent. For example, a promoter might load up on shares and trade them back and forth with other promoters, making it look like the company is worth investing in. Then, they dump all the shares, making a profit while leaving empty pockets for their investors.
There are plenty of pros and cons to go around when it comes to penny stocks. It’s important to think about them carefully before you decide if they are the right investment choice for you.