Is investing in penny stocks worth it

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Because of the risks associated with penny stocks, not all brokerage firms accommodate trading in them. It's usually straightforward to set up an account. Pick a company, fill out its application form, provide your identifying information like your Social Security number, and fund your account.

Fidelity — Another option to buy penny stocks fee-free. Firstrade — Penny stocks are free to buy and sell. Keep costs in mind when deciding on which brokerage to invest with. Keep that in mind when you're looking at penny stocks. But don't completely discount brokers that charge commissions on penny stocks. Why Are They So Cheap? There are two basic reasons a stock might be cheaper and called a penny stock: The issuing company is new or relatively new and doesn't have the kind of track record that generates widespread investor interest.

The issuing company's stock no longer holds value due to poor business performance, legal or regulatory challenges, scandals, or any of a dozen other causes. An investor who buys into the first company hopes to ride the price higher as the company grows. An investor buys stock in distressed companies in the hope of a turnaround or buyout. In either case, the potential returns can be dramatic, making penny stocks so appealing to many investors.

In both cases, you're more of a speculator than an investor. After all, you're not betting on past performance — which is either unknown or known to be poor — but on events that have yet to play out. But if a penny stock trades on over-the-counter OTC , no such standards exist. For this reason, OTC penny stocks are much riskier than those listed on the exchanges.

Why Invest in Penny Stocks Reason 1: The single biggest attraction for penny stocks is the potential for super big returns. But because of their low prices, some penny stocks double, triple, or quadruple. And some even produce to-1 gains, often in a short amount of time. Those types of gains are not the norm with penny stocks, but the promise alone is enough to draw in investors.

While you may need to wait years for an established company to double in price, a penny stock can double in under a year and even in a matter of days. Of course, that requires the announcement of an earth-shattering event. Such events include the launch of a new product line, a takeover bid from another company, or the elimination of the negative force that brought the stock price down in the first place.

Penny stocks also appeal to small investors who can buy a large number of shares with just a few hundred dollars. Reason 3: But perhaps the most significant incentive is to get rich quickly. But it has to be stated categorically that while each of the above is possible theoretically, they're hardly typical. For that reason, invest in penny stocks only with money you can afford to lose.

The Risks of Investing in Penny Stocks Despite the potential for big gains, the risks of investing in penny stocks are more numerous than the benefits. Some of the risks to consider include: Limited liquidity — One of the reasons the price is so low for penny stocks is because of a lack of interest by buyers. That creates liquidity problems. When you want to sell, there may be no one to buy. That sometimes makes getting out in a hurry nearly impossible.

Limited information — If a penny stock trades on the OTC, company information will be extremely limited, if it's available at all. Unlike other stocks, there's no steady flow of reports to base your investment decisions on.

The company doesn't have to meet any minimum exchange-imposed standards. This dramatically increases the possibility of fraudulent activity. This gets back to the lack of available buyers. The smaller the pool of buyers, the wider the spread will be. The potential for bad news — Due to the low interest in penny stocks, it would take only a few sellers — or one dumping a few thousand shares — to send the price of the stock plummeting.

And while some investors benefit greatly from investing in penny stocks , others swear off of them because of the large losses that they may have accrued. With every story about a large winner, there are likely to be hundreds of stories of even larger losses.

Rather, investors simply need to find all of the information that they can before sending in a buy order. What Are Penny Stocks? This opens up the possibility to thousands of different companies. Because penny stocks have gained a less than stellar reputation over the past decade, many investors avoid them. However, the chance of profitability can be much greater than with blue-chip stocks. How to Buy Penny Stocks Buying penny stocks can be as simple as buying any security. This depends greatly on what trading platform you use.

However, it does not allow access to the OTC market. This is due to the stringent requirement and expensive cost of listing on a large U. Because of this, they may choose to list on the OTC or over-the-counter exchange. So if you want to buy penny stocks, your best bet is to go through a broker such as E-Trade, TD Ameritrade, or Fidelity.

One thing to keep in mind is that often, penny stocks can have low volume. This can lead to issues when trying to buy or sell. This is simply something that investors need to look out for. All in all, buying penny stocks can be easy with the right brokerages and tools at hand.

How to Avoid Illegitimate Penny Stocks While many penny stocks are legitimate, there is always the potential to find less legitimate ones. The best way to avoid this is through research. As any investor will tell you, research will always be your best friend. But, what exactly are you looking for? Well, one of the best resources out there is the OTC website otcmarkets. This site will tell you point-blank if a company should be avoided or not.

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