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10 Things to Know Before Investing in Penny Stocks

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Most people dream of financial wealth, seeing it as the gateway to a carefree lifelong holiday of freedom.

Many follow the advice of investors like Warren Buffet, who owes much of his $80 billion net worth to smart investment choices.

But how can you get started investing if you don’t have a lot of cash? A low-cost, high-risk form of stock called penny stocks is a good way to start.

Here are 10 things you’ll need to know about investing in penny stocks.

1. The Term ‘Penny Stock’ Is Disingenuous

Before we go on, let’s make an important distinction: no, penny stocks don’t cost a literal penny.

The name came about as sort of a joke.

Instead, penny stocks are named as such because of their low financial barrier of entry. It’s possible to find stocks for as low as $5, whereas most other forms of investing require a much greater amount of money.

2. Investing in Penny Stocks Requires Caution

Perhaps you’ve heard stories about people growing rich from their penny stocks. Those stories may be true, but they’re few and far between.

Investing in penny stocks is still investing at the end of the day and should be approached with as much caution. Talk to a financial broker before making a major decision like investing a large sum of cash.

3. Penny Stocks Aren’t Listed on Major Market Exchanges

If you invest in penny stocks, don’t expect to see your investments listed on the London Stock Exchange.

The major markets are less open than one may imagine.

4. Nor Will You See Major Companies Listed

If you’re looking for penny stocks, don’t expect to see companies like Facebook or Apple.

Penny stocks are reserved for smaller companies, which are often classified into two categories: micro-caps and nano-caps.

A company whose value tops at $300 million is classified as the former while nano-cap companies top out at $50 million.

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5. How to Find Penny Stocks

So if you can’t find penny stocks on the London Stock Exchange, where can you find them?

You can find them on what’s known as pink sheets. These publications specialize in listing up to date penny stock values. You can also find a list of penny stocks on Robinhood and similar sites.

6. Lower Prices Don’t Mean Less Risk

Too many people start investing in penny stocks because they feel it’s less risky.

On the contrary, the opposite is true.

Investing in smaller companies means less demand for their stock. Keep your finger on the pulse and do more research than necessary when investing

7. Penny Stock Trading Requires Fewer Regulations

Penny stocks are trained through over-the-counter (OTC) markets. These markets are far less regulated than others, meaning it’s far easier to get ripped off.

Always approach with skepticism. Look at a company’s track record before investing.

8. Trust Your Gut

Less regulation means more people attempting to rip off amateur investors.

Trust your intuition. If an investment opportunity seems too good to be true, it likely is.

9. Buy Fast, Sell Fast

Penny stocks are intended to have a high turnaround rate. In most cases, your best bet is to turn around and sell your newfound stock as soon as possible instead of sitting on it.

10. Yes, Penny Stocks Can be Profitable

Despite fewer regulations and questionable market exchanges, it is possible to make money off of penny stock. It can be a great option for students or those who wish to better understand the market but don’t have a lot of money.

Start small and continue investing when you have a good feel for the market.

If need be, enlist the aid of a professional broker who knows how to navigate the markets.

What to Know About Investing in Penny Stocks

Investing in penny stocks can be a great way to dip your toe into the waters of investing.

As you begin to explore your options, remember what you’ve read today and always approach with caution. In due time, you’ll be an investing ace.

If you’re looking for an online trading platform, check out our guide on getting started with WebTrader.

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