Penny stocks are known to trade at low prices, which means they can be lucrative. The stocks trade at below $5 for every share. However, the stocks can be hazardous since they have fewer regulations. Avoid being scammed by using only the reputable brokers and transact with firms on the renowned stock exchanges.

Ensure you stay clear of unsolicited offers. Penny stocks are hazardous so it is advisable not to bit more than you can chew. Typically, the average investor is attracted to penny stocks as they fetch low prices with promises to gain big.

However, what they have to put in consideration is that these stocks have limited information, low liquidity and bad actors which makes them one of the riskiest ventures. Penny Stocks are not a reasonable investment strategy. But as a risk-taker in search of high reward/high-risk investment, this guide is specifically for you.

Penny Stocks Definition

These are the cheap stocks traded on exchanges. Any stock sold at below $5 for every share in the exchanges is regarded as a penny stock. They are also known as “over the counter” stocks and are sometimes referred to by the size of capitalization of the firms issuing them.

Why are They Low-Priced?

Penny stocks are traded for under $5 since they have a low-value. Some penny stock firms have little financial history and are still new in the market, which makes them low value. However, some companies have been through hard times, making their stocks less than $5. It is possible to make money on penny stocks, but most investors will make losses.

Who Should Venture in these Stocks?

Professional speculators or thrill-seeker investors can perform well with penny stocks. Penny stocks are ideal for investors who perform quick trades to capture the slight adjustments on prices. Day traders and adrenaline junkies will appreciate playing with the penny stocks. Keep in mind that these stocks are very volatile.

Risks involved in Penny Stocks

Limited information

Most of these stocks traded will have few regulations and rules which make it hard to make calculated decisions.

Low liquidity

These stocks are not easy to sell at the price and time you would want.


Some investors conspire to alter the trading volumes and prices of penny stocks to mislead others into making rush decisions which could later hurt them.

Investing in Penny Stocks

Decide the amount you are ready to risk

Many investors take advantage of a diversified portfolio to limit their risks. Penny stocks may also be included in your portfolio list, but you should balance the stocks with other low-risk investments. You are advised to use the excess cash that has no significant value to you and invest in the penny stocks and not your huge earnings or salary.

Invest in Huge Exchanges

When investing in penny stocks go for the colossal stock exchanges such as the Nasdaq or New York Stock Exchange. These exchanges have strict requirements before the listings go live. Among the requirements could be that the shares need to be priced at the least price of $1. There are good options for over the counter sales that you can look into. Just ensure you trade on reputable exchanges to avoid any instances of fraudulent activities.

Look out for OTC exchanges where there are few requirements for the penny stocks. Such exchanges will not attract as many legitimate companies, and this is where fraud cases are rampant.

Work with reputable brokers

Find brokers that strictly adhere to the SEC regulations. The broker should readily provide you with the updated financial information of any financial firm they recommend. These brokers should also ask for a flat transaction fee up-front and not commission per-share basis. There are numerous options online that you could look for and invest in the penny stocks.

Perform Extensive Research

To avoid being scammed, it is prudent to know well the companies you are interested in investing in. Before you invest in the penny stocks, take a keen look at the companies offering the stocks. Look for their:

  • Financial position – you ought to invest in companies that have cash on hand and assets that bring them revenue. The firm should also be audited regularly.
  • Financial transparency – the ideal firm ought to have publicized their financial reports and have a stringent growth strat
  • High liquidity – look for stocks where high volumes are traded. This way, you are sure to sell your stocks quickly. Experts recommend a company trading more than a million shares daily.

Evaluate where your source the information

Credible information about a firm will be from SEC filings. You could also get any analyst report published by an investment firm, reputable brokerage or a financial-research firm. Any cold emails, unsolicited contact or telemarketing calls should be red flags.

Do not trust any stock recommendations on sponsored content on blogs; make sure you research first about the company.

Penny stocks are cheap and therefore, attractive to most investors. However, trading on penny stocks feels more like a gamble than an investment since the vast majority ends up losing their money. Remember if the penny stocks deal seems too good to be true then probably that is the case. This is not to drive you away from penny stocks; an investor does not thrive on blue chips only, you could try out your luck with penny stocks, who knows what could happen.

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