Penny stocks are well known for their high risk-reward. But what exactly does this mean? Let’s break it down to understand it better.
Like any investment vehicle, penny stocks too, have some inherent risk. However, there is also the scope for massive rewards in the case of penny stocks.
Penny Stock –Risks
Following are the major risks associated with penny stocks.
Pump and dump schemes: Pump and dump basically involve posting false and misleading positive statements of a penny stock and artificially inflating its price. Then, these individuals sell the cheaply purchased stock at a higher price. Non-reputable penny stock newsletters, social media, and email mailing lists are typically used for distributing these pump and dump schemes. Unsuspecting investors buy these stocks and lose a massive amount of money in the process.
High Price Swings: Typically, the price swings in stocks happen only to a limited extent. But in the case of penny stocks, even a single news can cause major percentage moves in its prices. Penny stock prices can surge to double or more of its value or lose double or more of their value in a matter of seconds, minutes, hours or days.
Short and Distort Schemes: This is actually the opposite of a pump and dump scheme. Here, scammers short sell the penny stock and then spread false rumors regarding the stock, causing its price to plummet. Then they make profits while genuine investors end up losing a lot of money.
Scams: There are many scams prevailing in penny stocks. In case of mining scams, the company claims to have found gold or diamond mines which eventually turns out to be false. The no-net-sales scam stipulates that investors should not sell the stock for a specified period of time. During this time, scammers make profits and exit the stock while investors lose money.
Penny Stock –Rewards
Penny stocks also have good reward potential.
Huge profits: Thanks to the wild swings in prices, you can potentially make enormous returns. You just have to make sure to time the buying and selling of stocks based on technical indicators and signals.
Big Winners: Many excellent companies started off as penny stocks. There are still many undiscovered gems of companies currently trading as penny stocks. Identifying these companies can benefit you immensely in the long-term.
Faster Profits: Penny Stocks can yield big profits quicker than regular stocks. For regular stocks, it may take years while penny stocks can give you similar rewards in just days or even hours.
Small Investments Can Double: Investing in penny stocks do not require a huge amount of money. They can easily double within a smaller time-period and are also accessible to most investors. This makes it one of the best investment instruments.
As you can see, Penny stocks have both risks and rewards. When someone talks about risk-reward of penny stocks, they are typically referring to the risks and rewards that are listed above, associated with penny stock investment. By gaining the necessary knowledge of penny stock investing, you can minimize risks and maximize rewards. Happy trading!