Penny stocks are known to be volatile and unpredictable. But they also carry the appeal of low entry points and high potential returns.
For investors who have a relatively higher risk appetite and enjoy fast-paced markets, penny stocks can be an intriguing playing field, albeit a bit dangerous.
If you’re curious about what penny stocks are and how to invest in them, this guide will walk you through the basics, risks, and strategies so you can make an informed decision.
What Are Penny Stocks?
Before we talk about how to invest in penny stocks, it’s important to understand what penny stocks even are.
Penny stocks typically refer to shares of small companies trading for less than $5 per share. They’re often found on over-the-counter (OTC) exchanges, although some trade on major exchanges as well.
Since they belong to smaller and less established companies, penny stocks tend to have:
- Low liquidity
- High price volatility
- Minimal regulatory oversight
- Limited public information
All of these factors make penny stock trading riskier, but also full of potential for those who time it right.
Why Do People Invest in Penny Stocks?
Penny stocks are appealing to some investors for their:
- Low capital requirement. You don’t need thousands of dollars to get started.
- High reward potential. A small movement in price can result in huge percentage gains.
- Speculative thrill. Some investors simply love the adrenaline rush.
That said, it’s important to temper excitement with caution. Just because a stock is cheap doesn’t mean it’s a bargain.
How to Start Investing
If you’re interested in penny stock investing, here are the steps to begin:
- Choose a reputable broker. Not all brokers allow OTC trades, even if they allow other types, like the SoFi platform. Make sure your platform supports penny stock trading and doesn’t charge excessive fees.
- Do deep research. Because penny stock companies don’t always report earnings or follow strict SEC guidelines, you’ll need to look deeper.
- Look into all available information. This includes company leadership and history, recent news, and financial statements if available.
- Start small. Don’t invest more than you can afford to lose.
- Set exit strategies. Know your profit target and stop-loss limit before buying.
Risks of Penny Stock Investing
Investing in penny stocks isn’t for everyone. You also have to deal with:
- Lack of transparency. Many companies aren’t required to report financials, which can leave you in the dark.
- Market manipulations. These stocks are often the target of scams and false hype, which beginners might fall for.
- Low liquidity. It might be hard to sell your shares quickly at a fair price.
- No dividends. Most penny stocks don’t offer returns outside of share price appreciation.
If you’re a long-term investor focused on stability, penny stock investing might not be the right choice for you.
Should You Invest in Penny Stocks?
As with any type of investing and trading, penny stocks also come with their unique risks. If the concern is whether you can make money with them, you absolutely can. But it takes solid strategy, lots of research, and the stomach to handle losses.
The most successful penny stock traders treat it like a business. They study patterns, stick to a plan, and don’t chase the “next big thing.”
