Last Updated on November 24, 2020 by Henry John
Penny stocks are stocks that trade with a share price of $10 or under $10. They can be stocks of large-cap companies like Ford, or small-cap companies like Casa Systems. Their relatively cheap share price make them an interesting and unique kind of stocks.
These uniqueness and interesting features of penny stocks make them extremely attractive, especially to growth seeking investors.
Common Sense: The ‘art’ and ‘science’ of investing in stocks with a share price of $10 or under $10 is known as penny stock investing.
In May 1997 when Amazon went public, its stock price traded at $1.73 and today amazon’s stock trades at $3,099.40. In short, Amazon went public as a penny stock. Investors who build a portfolio of penny stocks are mostly seeking wild growths, similar to the wild growth of the Amazon experience after it went going public.
Most penny stocks are usually small-cap companies that are yet to find their feet, yet to establish themselves competitively and are still struggling for consistent profitability. As such, the typical penny stock is a stock of a company that is unstable and unpredictable, hence, most penny stocks are highly risky commodities. The higher the rewards, the higher the risk: Typical penny stocks for you.
There are a lot of upsides to investing in penny stocks, and the upsides comes with a lot of downsides too.
Penny stocks can be risky, nonetheless, they can be highly rewarding; here are some advantages/benefits of investing in or trading penny stocks:
1. They have the potential to bring in mind-blowing returns
This, for me, is why I love penny stocks. They resonate with who I’m as a person. I’m rising really strong financially having started small from the scratch, with no headstart from anybody. And I love seeing things go from small to something really big.
Penny stocks offer similar promise, they are small and have the potential to become really big stocks tomorrow. I used to think (and I still do think) that its easier for a penny stock worth around $1 to double and even triple in one year, than for Amazon’s stock which is currently worth around $3,000 to double in the same time frame.
And when you also put into consideration the fact that a lot of the winners in the past few decades started as penny stocks, it reinforces the notion that really good penny stocks can rise from their small status to become the big winners of tomorrow.
For all the hype and attention Tesla’s stock has gotten this year, it has only grown by 470% YTD, which by the way is incredible. However, Nio, another electric vehicle company, started the year as a penny stock and has seen its stock grow by over 1,200%; now, that’s mind-blowing.
2. They are relatively affordable, giving everybody a shot at stock investing
Because of their relatively cheap entry price, with just $100 you can own, at least, 10 shares of a penny stock. With penny stocks, it doesn’t take much to get started.
When I wanted to start investing in the stock market, I didn’t have much money, because of that I couldn’t stomach buying the likes of Amazon and Alphabet. One share of these stocks cost north of $500. I couldn’t stomach buying one share for $500. One share of one stock, doesn’t move the needle for me, at least, that was how I felt.
However, investing $500 in penny stocks will entail that, at the very least, I will own 50 shares of different stocks. And the feeling that comes with owning your first 50-100 shares, cannot be overstated, and penny stocks gets you there easily without breaking your bank.
Do note that some brokers like Robinhood and M1 Finance, allows investors on their platform to buy fractional shares. That means an investor on their platform can pay as little as $1 for a portion of a share, even if that share’s full price is in the hundreds of dollars.
This feature offers investors like me that started small, to be able to buy share of their favorite companies like penny stocks.
Nonetheless, buying fractional shares of an expensive stock is not the same as buying penny stocks. You can buy Amazon’s stocks for $1 at M1 Finance, however, you can’t expect it to grow wildly as you would normal penny stocks.
Let this stick: The fact that brokers are now offering fractional shares, making share of companies that cost hundreds of dollars to be bought as penny stocks, goes a long way to show that there’s an unfair advantage penny stocks’ affordability have over expensive stocks.
3. Penny stocks can grow rapidly in a matter of days
Penny stocks can grow crazily in few days, especially small-cap penny stocks, and this is because it doesn’t take relatively much activity to make the penny stocks’ share price skyrocket.
Last week when Tesla was included into the S&P 500 this lead to an industry wild growth for EV stocks, and all the six EV penny stocks that I listed two weeks ago are now, unsurprisingly, no longer penny stocks. In the space of five days these stocks have seen their share price move up rapidly.
This particular feature of penny stocks make them the most attractive for make-money-quick investors. With penny stocks, one doesn’t necessarily have to wait years to seen significant growth. Rapid growth can happen in a matter of days.
4. Because of their volatile nature, they can be more rewarding for short traders
I don’t trade shorts, it’s just not my thing, I avoid it without wavering. However, there are traders who make lots of money trading shorts and there’s nothing wrong with that.
If you think that the movement of a company’s stock price is going to go north over a period of time, going long on the stock would definite not make you money, however, shorting the stock will see you profit from the company’s misfortune.
There’s a popular notion that most investors investing in penny stocks, end up losing their money. This is because of the relatively volatile nature of penny stocks.
Common Sense: If most penny stocks are tipped to go north, shorting the penny stocks that are most likely to end up north, will see you profit massively.
There are always opportunities in the mess. In third world countries with messy economies, the typical investor is most likely going to lose money, that notwithstanding, there are certain types of investments that flourish in messy economies. And this is no different from shorting penny stocks.