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Quick notes:

  • Penny stocks are affordable.
  • Turn around time tends to be fast.
  • They’re great for practice, but can be tricky to get right in the long term.

There is a wealth of information across the internet about stocks of every kind, but one type, in particular, that attracts a great deal of debate are penny stocks. But what are penny stocks? Why is there so much controversy surrounding them? We can help you break that down with just a few easy pointers.

What are penny stocks?

The Security Exchange Commission (SEC) defines a penny stock as any security trading stock below the value of $5.00 USD per share, though many penny stocks can be purchased and traded for much less.

Penny stocks are normally offered by newer companies that don’t yet have an established track record within the market. Traders and investors who are looking for shares that don’t present a great deal of financial risk can easily buy penny stocks at very affordable prices and trade them in a relatively short space of time, sometimes even as short as 60 seconds!

The obvious value to penny stocks is that just about anyone can get started trading them immediately with very little capital.

How do penny stocks work?

Before a new company can become a major part of the market, they need investors who are willing to trade with a stock that has not yet been fully tested. Companies can remedy this by offering up shares of their stock for significantly lower prices than usual.

Once a company offering penny stocks makes shares available to investors, they allow investors to trade with agility. Lower priced shares can offer a higher reward to the tune of up to fifty to eighty percent and can do so fairly quickly, simply because there is not as much capital that needs to move.

Some benefits to penny stocks

The obvious value to penny stocks is that just about anyone can get started trading them immediately with very little capital. When shares are only $1.00 apiece, the risk is far lower than typical stock trading (depending on how many shares you buy, of course!).

This makes penny stocks very attractive for people who are unable to invest a great deal of money in the market as well as stock traders who are just starting out.

If you are looking to practice trading and gain a little experience in the market before investing more money, penny stocks are a very affordable way to do so.

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Here is what to be careful of when investing in penny stocks:

The quick turn around time and the potential for a high return on investment are attractive, but it’s also addictive. With such low figures and such fast trades, it’s all too easy to try again and again even after the market has not moved in your favor.

Penny stock traders, especially those who are new to the market, may get too hasty and find themselves buying up too many penny stocks to keep track of. With haste comes inconsistency and careless mistakes, so while penny stocks are a good place to start and an even better place to practice, they are difficult to maintain longterm and can lead to gambling practices.

If penny stocks are where you would like to start, be sure to watch the market carefully and do your research about which penny stocks are more valuable (and less risky) than others.

This will help prevent bad practices and keep your capital safe in the long run.

A deeper dive – Related reading from the 101:

Tips to get your finances in order and where you can begin to invest.

Things to be wary of when investing in newer, not yet regulated stocks.