What are Penny Stock? – Definition, Characteristics, and Risk Factors

Humans are attracted to things that are free or tremendously cheap. So, it should come as no surprise that investors are attracted to cheap stocks, better known as Penny Stocks. Penny stocks are very popular among retail investors because they trade at low-priced stocks. This enables them to purchase a lot of shares by investing just hundreds or thousands.

What are Penny Stocks?

The idea of penny stocks was derived in the USA. It is derived from a value of currency known as a penny. It is the same as that of one-hundredth of a US dollar. Penny stocks are traded at a low price and have a very low market stake. The meaning of penny stocks is different for every country. For instance, in India, the stocks traded below Rs. 20 are often known as penny stocks. However, in the USA, stocks that are traded below $5 are known as penny stocks. 

These stocks are considered a penny because many traders who invest in penny stocks will leave as soon as they get a good return on their investment. Penny stocks make quick money in the stock market; you should know when to enter and leave the stock game at the correct time.

How to know if a Stock is a Penny Stock?

Penny stocks are mainly provided by companies that have a lower market stake. Thus, penny stocks are also known as micro-cap stocks, small-cap stocks, and nano-cap stocks. A company’s market capitalization can be known by multiplying the latest share price with the number of shares outstanding. 

Before explaining further, if you are a beginner and planning to invest in penny stocks, you must consider The Thought Tree (T3). The best stock market institute in Jaipur. They will help you to become a pro in the stock market. 

What are the Features of Penny Stocks?

1. Low Price

Investing in penny stocks is relatively cheaper. Penny stocks in India are normally valued lesser than Rs. 10. As a result, this captivates investors to purchase a considerable amount of penny stocks with low capital.  

2. Less Information

Comparatively, young companies provide penny stocks. Thus, there is less information accessible in the public domain. These types of companies normally don’t have a good reputation for operations and revenues. 

3. Low Liquidity

Penny stocks in India are normally illiquid. This is why it isn’t easy to find investors who want to buy these stocks. It won’t be easy to sell the stocks at the right time. Therefore penny stocks are not a correct investment choice, specifically during an emergency.

4. Multibagger Penny Stock

Penny stocks are capable of offering good returns compared to other securities. Some penny stocks can evolve into multi-baggers, which means that the stock will profit in a manifold of the investment sum. 

Read More: Binance vs Coinbase

What Are The Risk Factors associated with Penny Stocks?

Penny stocks are known to be very risky. These stocks are dependent on the conditions of the market for an increase in their value. Each stock is connected with basic perils; however, penny stock has various factors which should be considered before investing in a stock.

1. Information is Limited

The information for penny stock is limited and not genuine, keeping in mind that these stocks are provided by companies and startups with low market earnings. Penny stocks are listed below big stock exchanges or unknown exchanges. Information like financial integrity, chances of growth, previous data may not be at one’s disposal. It is advised that you do extensive research on the stocks before investing your well-earned money.

2. Scams

Penny stocks are commonly used for scams. Scammers buy a good amount of stocks and increase the price to allure retail investors. Many people and companies who are associated with laundering money use a scheme known as Pump-and-dump. It means the scammers spread the word in the market, and when buyers invest a good amount, these scammers dump the stocks, leading to a low price.

3. Low Returns

If you think of penny stocks as a long-term investment option, then let me tell you that it is not a good choice. Penny stocks are often offered to companies that are experiencing financial difficulty. There is a possibility that these companies might flop in the long run. And if you are thinking about short-term returns, you might not earn a good amount of money as there is a risk.

4. Chop Sticks

In this case, an unknown broker will buy stocks at a big discount relative to the latest rate of the market as these stocks are traded once in a while, so it is very hard to decide a fair value. These brokers sell the shares at a high price and make a good profit leaving the buyer at a loss.

Final Word

There are many risks involved in investing in penny stocks, so an investor should try not to invest money in penny stocks. It might look like investing in penny stocks is a shortcut for earning quick money; however, there are many risks associated with it, and you might end up losing your hard-earned money.

But, if you think that there are reliable companies and their penny stocks can get you good returns money in a short period, we would advise you to do meticulous research and collect all the information before investing. 

If you do not want to invest in penny stocks, various options are less risky and invest in stocks like small-cap stocks, large-cap stocks, mutual funds, etc. There are numerous choices, so it is dependent on your financial goals. Keep in mind that high-yielding investments begin with a smart choice. Happy trading!