For newcomers to the financial market, penny stocks can seem, at first glance like the easiest way to start making money on small investments. If you sign up for newsletters from financial magazines, then you’ll constantly get updates about the hottest and most exciting penny stock to hit the market. Of course, before you can decide what you want to invest your money in, you need to understand what the term penny stocks actually means. In this blog post, we’re going to get to the bottom of the purpose of the penny stock, and how you can use it in your financial portfolio.
Defining the Penny Stock
Let’s start simple, what is a penny stock? Penny stocks are small-cap, low price stocks. Though their name might suggest otherwise, the truth is that most penny stocks won’t cost a penny. The SEC (Securities and Exchange Commission) regards a penny stock to be anything that costs less than $5. Individual investors (people without investor guidance), generally approach penny stocks with caution and curiosity. After all, penny stocks are separate from all the major exchanges and stocks that often appear in the media. However, just because you don’t hear about penny stocks as often on the news, doesn’t mean that they’re not fast-paced assets. And, occasionally, some of these stocks dominate the news cycle. Stay tuned for a tangible example of just such a stock below.
How to Buy Your Penny Stocks
Just like purchasing any other kind of stock for your financial portfolio, you can purchase a penny stock through a stockbroker. Whether it’s listed on a major exchange or not, you may still be able to get access to a penny stock through the right financial partner. Importantly, while the cheaper stocks listed on common exchanges like NASDAQ and NYSE aren’t always considered to be traditional “penny stocks,” they do offer the benefits of these low-price investments without as much risk. Penny stocks outside of the major exchanges have earned something of a reputation for being associated with corruption and scams, which it’s why it’s so important to research your investments. Major exchange stocks might not give you as much potential growth as a true penny stock; they can be more reliable too.
Why Would You Buy Penny Stocks?
Importantly, there is a risk of buying penny stocks, however, the same could be said for any investment strategy. Even the most legitimate penny stocks come with a high degree of risk. That’s the price that investors need to pay if they want to get access to a cheap stock that’s capable of making them a lot of money. You might be wondering of course, why people would bother to invest in penny stocks if they’re so risky? The simple answer is that they’re volatile. Penny stocks are prone to violent fluctuations in price, which is what makes them so valuable and risky at the same time. A stock worth less than $0.06 could jump to $12 in a couple of weeks. It’s happened in the past.
Consider a popular penny stock that is constantly in the news these days, MoviePass! Technically the stock itself is Helios and Matheson (ticker: HMNY), which is the parent company of MoviePass. They have made the headlines lately for all of the wrong reasons, but sometimes even bad publicity can lead to good stock gains. This is a theatre ticket service, wherein the consumer paid a set monthly fee and was allowed to see one movie per day in return, without restrictions of limitations. At face value this a great idea, unfortunately, the company went through a major cash burn and found the business to simply be unsustainable in its current form. Not only did the stock crash to essentially worthless, but they engineered a reverse stock split and consolidated 250 shares into 1, thus cosmetically propping up the share price to $25 again in order to avoid delisting from the exchange. It only took a matter of days until the share price went right back into penny status. Still, they are a company with over 3 million subscribers. That is a large base of users to collect data, turn revenue, and use to build the business back up to something that makes sense. While this company has all the optics of a penny stock, they seemingly have some upside that might make the “juice worth the squeeze”, if you will.
The trick with penny stocks, as with any investment strategy, is finding the right stock, and choosing the right time to invest. Obviously, there is no crystal ball, or one size fits all strategy, you simply need to understand the risks and determine how much you are willing to undertake for what could potentially lead to a large payoff.