what is a good penny stock to invest in
Are Penny Stocks a Good Investment?
Everybody likes a bargain, and stocks with low share prices certainly seem similar bargains. With some high-priced stocks costing hundreds or even thousands of dollars for a single share, ownership penny stocks -- stocks with share prices of less than $five -- tin can be a tempting style to try to grow your money apace. However, penny stocks more often than not have a well-deserved reputation for burning investors.
Information technology is possible to achieve potent returns by investing in immature companies with small valuations or depressed stock prices, simply typically information technology'due south better to invest only in companies that are larger and have less speculative valuations. Any risky stock buys should at least be limited to shares of companies that generate meaningful revenues -- or are pursuing clear, realistic paths to growth.
We'll delve into how to identify cheap stocks, also as name some private stock picks that have pregnant potential. Merely first, let's take a closer look at penny stocks and why they accept such a poor reputation.
Tin can y'all brand money on penny stocks?
It is possible to brand coin with penny stocks. Then once again, it's technically possible to make money with whatever type of stock. Successful investors usually focus on the potential for their stock picks, regardless of price, to gain value over the long term.
There are enough of skillful reasons to invest in small companies. Investors who buy shares in fast-growing companies that are still modest capture a lot more share price upside than those who wait to purchase stock until the companies have grown into giants.
However, penny stocks are nigh never the bargains that they announced to be. Their shares are cheaply priced for good reason. At all-time, penny stock companies are unproven and small with dubious long-term prospects for success, and, at worst, the penny stocks themselves are vehicles by which con artists take advantage of unsuspecting investors.
Many penny stocks are traded so cheaply because the businesses backside them aren't worth much more that.
Tom and David Gardner, Co-founders, The Motley Fool
Penny stock investors often erroneously recall that a low share price indicates that the company has greater potential to grow than those with college share prices. In reality, the valuation of a company -- also known every bit its market capitalization -- is determined past 2 factors:
- The stock cost
- The number of shares outstanding
That second cistron is crucial considering how many shares to upshot is entirely upwardly to the company. One meg shares outstanding at $100 per share is worth exactly as much every bit 100 million shares outstanding at $1 per share. Moreover, a company with a $100 share price very probable has much stronger growth potential than a company with a $1 share price.
Regulatory authorities know that penny stocks are highly tempting to many investors, so they're quite explicit about listing their dangers. As the U.S. Securities and Exchange Commission states, "Investors in penny stocks should be prepared for the possibility that they may lose their whole investment." (Italics in original.) That'due south technically possible with whatsoever stock investment, but the total loss of value is far more probable with penny stocks.
Risks of trading penny stocks
Penny stocks come with substantial risks compared to those of ordinary stocks. The risks include the following:
1. Penny stock companies are tiny. Nearly publicly traded companies are large businesses that clearly demonstrate their value, which typically ranges from hundreds of millions of dollars to $one trillion or more. By dissimilarity, the companies that effect penny stocks are by and large tiny, with even the largest penny stock visitor typically valued at well below $100 million.
2. Penny stock companies are unproven. It'south rare for companies that you've already encountered in your daily life to be among the ranks of penny stocks. Rather, penny stocks are usually those of less established companies that have yet to prove that they can endure and succeed.
3. Penny stocks don't trade on major stock exchanges. Penny stocks are not listed by the New York Stock Exchange (NYSE) or the Nasdaq Stock Market place (NASDAQINDEX:^IXIC). Instead, penny stocks typically merchandise over the counter, or OTC. The companies whose stocks trade in the OTC market are subject to less rigorous reporting requirements than those included in the NYSE and Nasdaq. Efficiently buying and selling shares of penny stocks can besides be comparatively hard because stocks that are less frequently traded are more illiquid, meaning that wide ranges between bid and enquire prices are mutual.
4. Penny stocks are sometimes the targets of pump-and-dump schemes. Con artists often target penny stock investors by promoting a penny stock company equally the next hot investment. Building hype about a penny stock can pump up its share toll, and the price increase itself can be misleadingly cited every bit bear witness of the visitor'south success. After the stock price increases, the scammers typically sell (dump) their shares for profit and stop promoting the stock. The share toll then usually declines, causing large losses for the late-arriving investors who believed the hype.
Better cheap investments than penny stocks
Fortunately, there are better alternatives to penny stock investing. Cheers to the rise of fractional share trading, which enables purchases of less than ane share, you can frequently invest in stocks for which the share price is extremely high. For instance, a single share in a visitor similar Amazon.com (NASDAQ:AMZN) costs thousands of dollars, only you can buy whatever fraction of a share and still gain portfolio exposure to the stock's future performance.
Moreover, high-quality companies can have low share prices. All of these companies' share prices were less than $10 in early 2022:
- Zynga (NASDAQ:ZNGA) has watched its stock price reject to less than $10 among volatility for tech stocks, just the video game visitor stands out as an investment with limited downside and growth potential. The publisher's collection of gaming franchises and development studios is strong. In January 2022, Have-Ii Interactive announced their intent to learn Zynga for $12.7 billion.
- Sirius XM Holdings (NASDAQ:SIRI) operates a successful satellite radio network with millions of subscribers. Its stock toll has been less than $10 for much of its history, but its prospects are bright. Mergers and the rise of in-vehicle entertainment systems have helped to stoke business growth.
- Limelight Networks (NASDAQ:LLNW) provides content commitment network (CDN) services that help customers, including Disney (NYSE:DIS), Roku (NASDAQ:ROKU), and Tencent (OTC:TCEHY) to distribute streaming video to users. The visitor'south share toll has declined due to sales growth that seems underwhelming compared to the performances of competitors in the CDN space, but the business organisation still has long-term growth opportunities.
- Eros STX (NYSE:ESGC) consists of two cadre business units. The Eros partition produces entertainment content and operates a streaming service tailored to the Indian market. The STX division primarily creates film and television series aimed at Western markets, just this content is besides an nugget for Eros because information technology can be featured on its streaming platform. The subscription video market has huge growth potential in Republic of india and other Southeast Asian countries, making Eros STX stock a skillful fit for risk-tolerant investors. Equally of early on 2022, the stock is trading for nether a dollar. Call up: it may be trading that low for good reason.
These are just a few of the stocks that you can buy without spending a lot for each share. Investors who are willing to assume high risk in club to potentially achieve high returns have plenty of stocks from which to choose that offer improve risk-reward dynamics than penny stocks.
Paradigm source: Getty Images
How to invest in penny stocks (if yous're expressionless fix on doing and then)
If we can't persuade you to non invest in penny stocks, then you should at least follow these basic precautions to protect your portfolio:
1. Determine the maximum dollar amount that yous're willing to lose. Effigy out how much money you can beget to lose and so limit yourself to investing that amount. That style, if your investment goes under -- as many investments in penny stocks do -- then you lot won't be in real financial problem.
2. Don't pay commissions if you can avoid them. Make sure that the brokerage firm you lot utilise doesn't accuse trading commissions. Many brokers accept gone commission-costless on stock trades but with a grab -- commissions or special fees are still assessed by some brokers for stocks with share prices below a sure level.
3. Go a second stance. Be sure to bear contained research on the penny stock companies that interest you. Besides oftentimes investors rely solely on information from the company itself or from stock promoters, leaving them prey to fraudulent schemes. If y'all can't really find any information from third-party sources, that past itself is a warning sign that a pump-and-dump scheme may exist occurring.
4. Be realistic with your expectations. Finally, empathize that almost no penny stocks make coin over the long term. Most of the rare profits that penny stock traders generate arise from short-term moves that are based on emotion rather than the company's stock or business fundamentals.
Penny stocks represent a volatile and risky part of the stock marketplace, and many investors have suffered big losses trying to invest in them. With so many well-established companies available to own, there'south little reason to settle for the highly risky companies that issue penny stocks.
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Source: https://www.fool.com/investing/stock-market/types-of-stocks/penny-stocks/
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