Penny shares may look like a very attractive investment venture for some people because of their very affordable prices per share. People who invest in these stocks can feel so rich with the amount of stocks they have on a company. But then, investing in these stocks can also give a number of benefits to investors who have them. Thus, this kind of stock has etched its own popularity. There are quite a number of advantages and disadvantages that a potential investor should be aware of, so caution and knowledge of these are needed.
One of the more obvious and largest advantages of getting into penny stocks is that for a small initial amount, a person can already have this financial instrument. One can already own thousands of shares of a particular stock just for a few dollars. A majority of these stocks are priced at 10 or 20 cents, and there are some that go as low as 5 cents per share. With these low prices, an investor can get started in investing in the stock market even with a limited starting capital. For stocks listed in the 'mainstream' stock market, the same amount of money will only give the same investor not more than 5 shares, which stops investors without enough money to get involved. The market has become open to more investors because of penny stocks.
Even with the small costs, penny stocks still carry with them a large potential for profit. Example, if an investor owns 10,000 shares of stock that costs 10 cents for every share (for a total of $1,000), that investment could grow into $1,500 should the value per share rise to even just 5 cents. On the other hand, if the same $1,000 was invested in stocks that has a $50 per share cost (which translates into 20 shares), if those shares rise by 5 cents, the profit gained is only $1. Large increases in share process have to happen for investors to earn in the mainstream stock market, which is not the case in penny shares.
But along with these advantages comes a great deal of risk when investing in penny stocks. While an increase in the stocks' value can be very advantageous to the investor, even the smallest of declines can also cause a dent in the investor's initial investment. In the example above, what if the stock's value declined by 5 cents? That would mean half of the investor's initial capital is lost, as his or her $1,000 would be cut to $500. This makes penny stock investing very speculative and requires precise moves in terms of buying or selling the shares according to when it will be advantageous to the investor.
Moreover, there is not much information available on companies that offer penny shares. Companies that offer blue chip stocks or are in the major stock markets have their information readily available to everyone. However, information on penny stock companies are scarce and are oftentimes not validated. An investor has to carefully scrutinize whether the company he or she will be investing in is legitimate, as a lot of scam companies that run away with their investor's money exist in the penny stock market.
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