If you’ve watched Boiler Room and The Wolf of Wall Street, then you may think of the stock market as a gold mine. However, there’re two sides to the coin.
In this article, we’ll explore both sides. The pros and cons.
The Benefits
1. The Future Winners
With proper research, chances are you’ll come across several companies trading in the penny section. Such companies move in the shadows and they have what it takes to become the future winners.
This includes skilled employees, stellar financial positions and ever-increasing market share and most of all innovative ideas to create disruptive services and products that have the potential to topple the giants in the industry.
2. Magnify Small Investments
You might be a college graduate and you’ve just landed your first job. Of course, your priority is to clear the burdensome student loans. On the other hand, you also want to invest in the stocks and with the myth of “stock investments are for the rich,” you can opt for penny stocks instead.
You see, with $500 dollars you can buy thousands of shares of penny stocks. The same amount will only get you a maximum of 4 shares in a larger company if you’re lucky.
3. Investing is Exciting
The stock market is volatile and even the slightest gain is a reason enough to celebrate. Think about it. If you make five percent on top of your investment at the end of the year, wouldn’t that get your heart pumping considering the numerous ups and downs during the year?
The Drawbacks
1. Scammers are Everywhere
Not even the stock market is immune to scammers. Due to their thin trade and low price, penny stocks provide a fertile ground for scammers to thrive. The worst of them all being penny stock promoters.
Who are penny stock promoters?
These people simply sell or buy your penny stocks at a fraction of the cost. How do they do it?
By looking you straight in the eye and lying to you. That’s it.
2. Absurd Valuations
Penny stocks are no strangers to absurd valuations. In fact, not once, not twice but numerous times. Due to mentions in the media or a fast-moving rumor, a penny stock can hike to unbelievable levels.
Some examples of such scenarios include Dot Com Stocks, Marijuana Penny Stocks, and Bitcoin just to mention a few. The most recent is when Tesla, the electric car maker purchased a certain company. What followed was an investor stampede but confused the company with another with a similar name.
The result. A 10,000% share price increase. This is before it plummeted to the ground.
3. Thin Trades
Large companies trade millions of shares every day. On the other hand, penny stocks only realize a few thousand each day. Others even record lower trading volumes.
4. Huge Losses
Stock trading is not for everyone. The same goes for penny stocks. The harsh reality is that many investors walk away with their heads down after a disappointing run in the stock market, which resulted in heavy losses.
The stock market and in particular the penny stocks come with tons of pros and cons. This means diving into this trade requires a personal decision because again, they aren’t for everyone.
