Pros and Cons of Penny Stocks

Penny stocks are a category of stocks offered by companies who have very low stock share prices. Investing in these types of stocks is very popular in the stock market, and it can provide you with a number of advantages as an investor. At the same time, there are a few disadvantages that you should be aware of. Here are some of the pros and cons of penny stocks.

Smaller Investment

One of the biggest advantages of investing in penny stocks is that they require a smaller initial investment. Many of these stocks can be purchased for $.10 or $.20 per share. This means that with only a few hundred dollars, you could be the owner of thousands of shares of stock. This allows you to get started in the market even if you have limited capital to work with. With a larger company, you may have to pay a few hundred dollars for a single share of stock. This prevents smaller investors from getting involved. With penny stocks, the market is open to virtually everyone.

Large Potential

Another advantage of this type of stock is that there is large potential attached to it. When you invest in this type of stock, there is a lot of room for growth in the company. For example, let's say that you invested $1000 into a stock that cost $.10 per share. This means that you just purchased 10,000 shares of stock. If the stock went up in value only $.05 per share, your investment value would grow to $1500. This represents a 50 percent increase in your investment value. On the contrary, let's say that you invested the same $1000 into a stock that cost $50 per share. This would give you 20 shares of stock. If the price went up only $.5 per share, you would gain only $1. In order to make good money with larger stocks, the prices have to increase quite a bit more than they do with penny stocks.

Risk

Even though investing in penny stocks can be very lucrative, it can cause many problems as well. This type of investment carries with it a great deal of risk as well as opportunity. In the previous example, it would take the penny stock's decreasing in value by only $.05 per share for you to lose half of your investment. This makes investing in the penny stock market a very speculative type of endeavor.

Lack of Information

When you invest in large companies, you should be able to find an abundance of information about them. You will not have to dig very hard to find financial statements or anything else that you need to examine. However, when you invest in penny stocks, this may not be the case. These companies will not be listed on the major stock exchanges, and you will find that there is less information about them.

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