To reduce overall investment risk, traders and investors are taught to create a diversified investment portfolio, which can be achieved by investing in different asset classes and different geographies, for instance. If you’re only investing in the stock markets, you can also invest in different activity sectors and in different kinds of stocks to diversify your portfolio.
Recently, traders have been increasingly attracted to penny stocks to diversify their portfolios with cheap stocks that can potentially turn into big profits. Penny stocks usually trade below $5 per share and represent small companies that are not listed in any big exchanges – even though it’s possible to trade penny stocks on the NYSE, or to trade large companies whose stock prices have sharply fallen, and thus qualify for the term.
Penny stocks are quite volatile, as it is not rare that some significant orders can trigger big price movements. Because they’re not very liquid, it can be difficult to buy or sell penny stocks at the price you’re looking for. It can also be complicated to get reliable information about companies to determine if they’re worth investing in. For these reasons, penny stocks are considered risky investments and are not a good fit for all traders.
To become a successful penny stock trader, you will have to work hard and be patient, dedicated, as well as well-prepared. It’s also important to have the right mindset and get the right penny stocks trading education, so then you can properly decide which companies to invest your money in.
Still, penny stocks can be great opportunities for traders looking to make money with limited trading capital. This market is also ideal for those looking for golden opportunities in trendy sectors like fintech, pharmaceutics, and the marijuana industry. The volatility of these sectors can still be used to make quick profits if you have an active trading style like day trading – not to mention that there are different ways you can reduce risk and protect your portfolio against volatility.
Now that you have an idea of the risks and opportunities linked to penny stock trading, you should ask yourself the right questions to determine whether or not this type of asset is right for you. Here are a few questions to help in your reflection process.
- How old are you? And what is your personal and family situation?
- What are your financial obligations? Do you have debts?
- What are your plans for the near future?
- Are you looking for security, income, or growth from your investments?
- Do you think that your trading goals are in line with your personal and professional situation?
- Do you often like to take risks? Are you prepared to face strong volatility?
- Are you resistant to stress?
- How do you deal with failure?
- Are you available to analyze and trade?
- Are you ready to do everything it takes to be prepared?
- How much will you be hurt if you lose all your money?
These questions are not an exhaustive list, but they’re enough to give you some direction as you decide if penny stocks are the right type of stocks for you.