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The rise and fall of penny stocks

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Penny stocks

If you’re looking to get into trading then you may be wondering where you should put your money. There are so many different markets that you can trade within and each has its own characteristics which you may favour or dislike. One example you may wish to do the bulk of your trading through is penny stocks. But be warned, it’s a very volatile market that has seen plenty of rises and falls over the years.

What is a penny stock?

A penny stock is a stock of a small business and it will usually trade for less than $1 per share but can also be sold up to $5 per share too. These are most commonly traded on exchanges such as the New Stock Exchange but are more commonly purchased and sold using over-counter transactions and not using an exchange. Over-the-counter transactions have no trading floor which means all quotations are done electronically.

What are the advantages and disadvantages of trading penny stocks?

Advantages:

  • High volatility means quick gains can be made
  • High potential for growth due to low price

Disadvantages:

  • Lack of available information to the public, so making an informed decision may be tough
  • No minimum standards mean investments are riskier
  • Lack of company history
  • Stock prices may be manipulated

What’s happened with penny stocks over the last few years?

Penny stocks are very easy to buy and sell which is why they’re so volatile. This causes the prices to frequently fluctuate and there have been plenty of successful penny stocks over the past few years including the GameStop stock which saw a share price rise of 892% in 2021.

However, rising interest rates, the COVID-19 pandemic and a war in Ukraine have impacted businesses all over the world. This has prevented rapid growth and in a lot of cases caused a drop-off in stock value thus showing a fall of many penny stocks over the last few years.

How to trade penny stocks?

So, if you’re thinking about a new stock to invest in online, then penny stocks may be the one for you. However, here are some things you’ll want to do to increase your chances of making money in this ever-fluctuating market.

Do your homework

With penny stocks being traded with lower entry requirements, you must do due diligence checks on the businesses you’re investing in. You can do this by checking their statements to ensure they’re in a solid place financially.

Use reliable stockbrokers

If you’re using a broker for your penny stock investments then ensuring they’re reputable is vital. This will help you to avoid scams and they’ll be able to show you why the stock you’re investing in is a good one.

Don’t overinvest

Whilst investments in penny stocks can yield a high return. Putting more money in than you can afford to lose shouldn’t be done. This means you’ll be able to stay on top of your finances at all times.

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