Why Trade Penny Stocks? 4 Simple Reasons Why

By December 13, 2018trading

Why trade penny stocks? As a new investor, perhaps you’ve become intrigued by the phenomenon of trading penny stocks and are wondering how to take the next step.

But before you dive in and start trading, it’s wise to learn more about how the system works so that you can determine whether trading penny stocks is well suited for you. Simple 

Penny stocks can offer many benefits to new investors, particularly those with small accounts. However, they aren’t without considerations and concerns.

Here, we’ll cover an introduction to penny stocks by addressing frequently asked questions and addressing common concerns.

Download the key points of this post as PDF

What Are Penny Stocks?

Despite their name, penny stocks aren’t always offered for actual pennies — they’re generally defined as stocks that trade for under $5 per share.

Why such low prices?

Usually, they’re offered by companies that are either still in a developmental stage, or companies that just offer one or two different products.

Sometimes, these companies do turn into success stories. For example, the now-successful True Religion jeans brand was initially offered as a penny stock. However, more often than not, these companies fizzle out.

Risk and Reward in Penny Stocks

It’s true: Penny stocks have a shady reputation.

Part of the reason is that, as we just mentioned, the companies offering penny stocks rarely amount to much.

Another reason is that there’s less regulation in the penny stock market. Unlike the big national exchanges where there’s a high amount of regulation, penny stocks aren’t held to the same standards.

Because of this, there can be a lot of fraudulent or overblown information out there about these stocks, so it can be hard to discern what’s true and what is not when it comes to these companies and their offerings.

Largely due to these factors, penny stocks are extremely volatile. The market can swing up or down very quickly.

For many investors, the volatility and the risk involved in penny stocks just isn’t worth it.

However, the same risk and volatility can offer opportunities for other investors …

Why Trade Penny Stocks?

In reading the above, chances are you’re wondering, “Why trade penny stocks at all?”

That caution is a good thing, because you want to go into penny stock trading with your eyes wide open.

But there are many benefits to trading penny stocks. Here are some of the reasons why it might be right for you:

  1. You don’t need a big account. This is another big advantage to trading penny stocks. Since penny stocks are priced on the low end, they’re accessible to traders with small accounts. You don’t need a lot of money to start trading penny stocks.
  2. Easy entry. One of the biggest advantages to trading penny stocks is that it’s extremely easy to get started. You don’t need any special certification or degrees. All you need is a laptop, an internet connection, and a brokerage account.
  3. Diligence can be rewarded. By now, you know that the lack of regulation can make it hard to tell which penny stocks are the real deal and which companies aren’t. This is one of the downfalls of penny stocks but also one of the potential advantages. If you’re disciplined enough to do your own research on the companies to evaluate whether or not they’re good investments, then you might be rewarded for your studies.
  4. Potential profit on the way up or down. With penny stocks, you can potentially profit as stocks go up or down in value. While many of the companies offering penny stocks will fail, this can actually provide an opportunity for traders to sell short. Short selling is basically the opposite of the traditional stock investment. Instead of buying a stock and hoping that it will increase and value before you sell, you’re betting that the stock will depreciate in value. You can learn more about short selling on the SteadyTrade Podcast.

Can You Really Make Money Buying & Selling Penny Stocks?

Naturally, we can’t guarantee that you’ll profit from penny stock trading — nobody can predict what will happen in the market.

However, this isn’t because trading penny stocks is particularly difficult, but it’s because few traders acquire the proper skills and knowledge to effectively trade these stocks.

Bottom line: If you haven’t learned how penny stocks work and if you don’t build a strong foundation of knowledge, then you won’t be successful.

To be an ace penny stock trader, you have to take the time to learn the rules. You must learn the basics of trading, how the market works, and how to predict patterns. You must be disciplined and tactical.

Even so, you’ll still experience some trial and error — that’s just a given in the trading world.

However, by mounting successes over time and slowly increasing your position, yes, it’s possible to make money selling penny stocks.

Conclusion

Trading penny stocks isn’t for the faint of heart …

It requires a high level of risk tolerance and demands strong discipline in terms of doing your research and learning market mechanics.

However, if you’re willing to stick with the process and grow over time, there are plenty of benefits to trading penny stocks. Who knows — maybe it’s right for you?  

Do you trade penny stocks? Why or why not? Share your comments below. We want to hear your story!

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