Should I Invest in Penny Stocks? How Much % of My Portfolio Should They Be?

You’re looking to invest but are unsure where? Today, there are so many options available to invest that choosing where to put your money can be a daunting task.

You may be wondering whether penny stocks are a good idea and, if so, how much of your portfolio you should invest. This quick guide will walk you through everything you need to know about investing in penny stocks.

What Are Penny Stocks?

Penny stocks are shares in small companies that trade on the stock market for less than $5 per share. While they can yield significant profits with little investment, penny stocks are highly volatile and risky investments as they often lack liquidity due to low trading volumes.

This can also result in losing a great deal of money in just a few days.

Volatility

Penny stocks typically represent companies that have limited resources and funds. Since penny stocks are highly volatile, they have rapid and unexpected liability changes every now and then. This means a high potential for profit as well as losses.

Buy on Margin

Buying on margin amplifies both gains and losses. So, if the value of your portfolio increases beyond what is allowed, then your broker can sell some or all of your penny stocks to balance out your account again with a smaller loan.

Stop-Loss Order

Stop-loss orders automatically sell a stock once its price falls or rises past a certain level. Once that happens to a penny stock, the sale becomes mandatory, and the stocks will execute it at whatever value that stock has.

If a penny stock’s value exceeds the limit, it will be declared sold.

Benefits of Penny Stocks

Small Companies Can Access Funding

In recent years, penny stocks have paved the way for companies to enter a larger-scale marketplace listing. Such opportunities allow the majority to have access to public funds.

Low Share Cost

Penny stocks are notable for their low price. As the name suggests, penny stocks don’t require a lot of money for you to invest. As a result, a low share cost benefits traders and investors on a budget.

High Gains

Penny stocks are known for their high gains. Since you’re investing in a small company, there is a higher chance that the value of your investment will increase rapidly. Higher risks can be beneficial if you want to make a quick profit from your investment.

Drawbacks of Penny Stocks

Although penny stocks come with many benefits, they also come with significant drawbacks due to their volatility.

High Risk

The high risk of investing in penny stocks is one of their most significant drawbacks. Since these stocks aren’t regulated like traditional investment vehicles, they are more likely to be affected by fraudulent activity like “pump-and-dump” cases.

Pump-and-dump cases are illegal acts promoting misleading information for people to invest during stock inflation.

Liquidity

Liquidity is the ability of a company’s assets to be turned into cash easily and quickly without affecting its market price. Even if the price of a penny stock rises, investors may be unable to sell before the price falls again.

Can You Make Money Investing in Penny Stocks?

Yes, you can make money investing in penny stocks. However, it’s essential to understand that penny stocks are a high-risk investment strategy.

It’s thus recommended that you seek advice from reliable brokers or financial advisors to start investing. You’ll have someone who has experience with the market, and they can give you sound advice on what types of investments might work best for you.

Plus, if something goes wrong with your investment, they’ll be able to help you figure out what went wrong and how to fix it!

What Is An Investment Portfolio?

An investment portfolio is a collection of investments that you own. It can include stocks, bonds, mutual funds, real estate investment trusts (REITs), exchange-traded funds (ETFs), and many other types of investments.

How Much Should I Invest in Penny Stocks?

If you’re considering buying penny stocks, start small by buying only a few shares. Then, build up your holdings gradually as you learn more about the market.

Start from 10% of your savings, and increase your investments over time. If you’re new to investing, don’t put more than 5% of your money into penny stocks.

Are Penny Stocks Worth the Risk?

Penny stocks are a huge gamble. And if you’re a conservative investor, chances are you won’t invest enough to make any real money in penny stocks. That said, with a little guidance from a financial advisor or trusted broker, you’re well on your way to raking in the rewards of investing in small companies.