In spite of common investing myths, it’s not quite as easy to make money off of penny stocks as people think. In fact, many people lose their savings quickly when they buy cheap stocks without performing adequate research into those stocks ahead of time. This overview provides more information about the penny stocks that are traded on the NASDAQ market.
What is a Penny Stock?
As you look at the NASDAQ market, you’ll notice that stocks range in price from a few cents up to several hundreds of dollars. Even so, you can’t predict the future activity of stock solely by its price. A penny stock is one that sells at a price that’s under $5. In an ideal situation, you will buy several shares of a stock at this low price and sell it later when the stock has grown considerably. This can help you double or triple your money if things play out perfectly. Unfortunately, it’s rare for a penny stock to perform that well and you may end up having to accept the investment as a loss.
How Can You Select a Good Penny Stock?
Choosing a penny stock that will perform well can be a bigger challenge than most people realize. A larger portion of penny stocks is composed of companies that are reaching a state of insolvency. The stock prices are low in that situation because the company’s board of directors is preparing for bankruptcy. In other situations, a newly offered public company may have low stock prices until the company shows a profit. As the business or startup grows and gains momentum, the stock prices will rise accordingly. However, if the company doesn’t grow, its stocks may remain stagnant or drop lower.
As this overview shows, researching each stock is important in determining future growth. The age of the stock, combined with its trade history and volatility, can help you predict how it will perform in the future. While trading in penny stocks can be especially lucrative, it can also be devastating if you pick a stock that drops instead of growing.
Before investing in any type of stock, it’s important to understand that every investment comes with risk. However, if you know your risk tolerance and research the stocks in which you intend to invest, you’ll be in a better position to grow wealth. Even in investing in penny stocks, a good investment strategy can help you make wise decisions.