Penny stock trading is a popular option for people who want to try the stock market, but who cannot afford to buy stocks in the main markets, because they are so much more expensive. The appeal with penny stock trading is that there's a chance – however slim, that you might buy stocks that could soar in value and make you rich.
The catch there is that the markets are quite efficient. If a stock is not worth a lot, it's because analysts don't believe that it has much value. When a stock soars in value it is because it has performed far better than expected. The stock took people by surprise – even those with acess to more information than the average person, and who spend their time analysing companies because that is their profession.
Penny stocks are highly volatile, and they can gain and lose a lot of value quickly. They are also companies that are smaller, and that have less financial backing. There is always the risk that the company could lose a huge amount of value quite quickly, or that one lost contract could lead to them going bust. Just look at the situation in the United Kingdom with Carillion. A FTSE 100 listed company went bankrupt, and because it deals with a lot of outsourcing companies, there are now tens of thousands of jobs at risk and a huge number of smaller UK based contractors are owed a lot of money. Some of those companies could go bust because Carillion cannot pay them, and they relied so heavily on that one company and its contracts for their income.
When you invest in Penny Stocks, you are exposing yourself to a high level of risk. The potential reward is also high, but you should remember that while each stock is inexpensive if you buy a lot of them you are risking a lot of money.
Invest in What You Know
One option for increasing the likely return with penny stocks is to invest in what you know. If you're an expert in construction, buy construction companies that you believe have a good future. If you're an expert in food, then look at food. Do not buy stocks that a friend of a friend says are a good bet, or because a newsletter suggested them. Unless, of course, you have money to play with and don't care if you lose it.
Investing is always a gamble. Penny stocks can help you learn the markets to an extent, but the investors that put money into those markets are less experienced than the ones playing the major markets, so you may see movements and patterns that are different to what the Dow Jones or S&P 500 might show. Learn to be patient, and remember that the alternative investment markets are a volatile place, and that you should not get too emotional about your money. Treat it as “buy and forget” and you could see some good returns.