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Is it a Good Idea to Trade Penny Stocks - The Pros and Cons

Companies / Investing 2021 May 26, 2021 - 12:26 PM GMT

By: Sumeet_Manhas


The world’s financial market is continuing to evolve at a rapid pace, both in terms of trading volumes and the range of assets available to investors.

While commodities and forex trading are amongst the most popular assets, penny stocks also offer potential value to investors. These are known as relatively high-risk securities that boast a small market capitalisation value, while they’re amongst the most accessible assets in the financial market.

In this post, we’ll ask whether it’s a good idea to trade penny stocks in the current marketplace, by considering the various pros and cons of this asset class.

Trading Penny Stocks - The Advantages

The term ‘penny stock’ is often used interchangeably with ‘micro cap’, although there is a slight technical difference between these entities.

More specifically, micro cap equities are classified as such based on their market capitalisation values, while penny stocks are appraised in terms of the real-time share price.

This leads us onto the primary advantage of trading penny stocks, which is that they’re priced at the lower end of the spectrum and therefore widely accessible to investors with relatively small accounts.

So, you can effectively trade and control multiple penny stocks with a minimal deposit, creating an easy entry into the market that can be quick, smooth and incredibly efficient. In fact, you can trade penny stocks with just a laptop, an Internet connection and a brokerage account, and the same cannot be said for alternative assets such as currency.

Despite the volatility associated with penny stocks (we’ll touch more on this a little later in the piece), it’s fair to say that this asset class is at least capable of rewarding due diligence.

For example, reviewing a company’s detailed financial and share price history enables you to select the right penny stocks for your portfolio, boosting your chances of earning a profit over an extended period of time.

What are the Disadvantages of Trading Penny Stocks?

We’ve already touched on the high-risk and volatile nature of penny stocks, which is underpinned by a number of market factors.

For example, these stocks typically have a history of price volatility, while there may also be a pronounced lack of history and information surrounding the underlying firm.

This can also translate into low levels of liquidity, which adds an additional layer of risk when trading penny stocks by making it difficult to buy and sell such assets in the real-time marketplace.

Similarly, there’s no so-called “minimum standard” associated with penny stocks, as such equities don’t have to fulfil certain requirements to remain on the exchange.

Often, firms that trade as penny stocks do so as they’re no longer able to maintain their position on a major exchange, so this is something to consider when performing your due diligence and trying to identify the best assets.

By Sumeet Manhas

© 2021 Copyright Sumeet Manhas - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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