What are Penny Stocks? Top Trading Tips For Beginners

What are Penny Stocks and How Do They Work?

Oct 22, 2019
  • Penny stocks are classified as stocks with a per-share value of $5.00 or less
  • Although they are much cheaper than many other stocks, they are also much more volatile to fluctuation. 
  • Therefore, there is a greater risk of loss when investing in penny stocks. 


Like they say, A penny spared is a penny earned.”

However, if we’re talking about investing in penny stocks, it’s quite easy to lose the penny that you invested since the world of penny stocks can be risky and complicated.


If you are someone who does not own enough money to make a big investment, then chances are you might be tempted to buy low-cost penny stocks.

  • Before you make the decision to invest, there are a few things you should be aware of. Continue reading to find out.


How do penny stocks work?

  • Penny stocks are basically like any other stock, but one should be more cautious when buying them as there is a lot of risk of loss involved.

As compared to other stocks, these ones are less liquid. This is because they exchange hands less regularly due to lower volume. Penny stocks also regularly experience many rate swings which cause them to be labeled as a risky investment.

  • Because of their lower market capitalization and per-share price, one should be cautious while investing in penny stocks. Many companies that sell penny stocks are known to be very unreliable.

With less inclusion from financial specialists, there is not enough data present on them which makes it harder to settle on decent trading decisions. Since there is no need for them to file with the SEC, the data available on them is usually limited and untrustworthy.



A penny stock is normally classified as a stock with a per-share value of $5.00 or less. You won’t find penny stocks being traded at the normal stock exchanges.


Rather, penny stocks are traded through pink sheets at over-the-counter markets. Smaller businesses and companies with assets valuing less than $5 million are more likely to invest in penny stocks.



How does penny stock trading happen?

Unlike ordinary stocks where offer costs can be found on the internet and in the paper, looking for the selling and purchasing cost of a penny stock is more confusing.

Let’s break it down!

  • Upon transaction, the broker organizes an exchange for you dependent on the offer value.
  • That is the sum somebody is happy to buy a stock at, also the asking value.
  • The price at which somebody is eager to sell a stock.


 What is the risk of investing in penny stocks?

Well, there is always a risk when it comes to investing.

Because penny stocks are usually sold by small to medium companies with little history of financials and the portion of the profit that brokers might keep for themselves, it becomes more difficult for one to earn profits on the investments made in penny stocks.  

There's also a very good chance that you will lose money. Most of the people who invest in penny stocks are the ones who are willing to get into and out of the market as soon as they can, and this too is a reason that these stocks are unreliable.


Can you earn rewards on penny stocks?

You might occasionally, hear success stories of penny stock on the market. Usually, this involves an investment by an unknown organization that leads to profit for the investors.  

Though this does not occur frequently, it is still one benefit of investing in penny stock. If a person invests in penny stock in its early stages and it starts to do well in the future, then there is a chance of earning profits through that stock.

But only a chance.


Are Penny Stocks Worth it?

These stocks can prove to be profitable only if the one who is investing has a complete understanding of them.

A wise thing to do is make an investment worth what the investor is prepared to lose. It’s better if the investor does not invest all his money in penny stocks, as there is a high chance that he might face a huge loss later on.

Hence, it is better to make small investments at first.

One thing that investors should do while purchasing penny stocks is set expectations that are realistic and always keep in mind that the chances of earning through these investments are lower.

Also, the investor should be ready to cope with the losses and misfortune that can occur due to investing in them. Prior to purchasing penny stocks, guarantee that strong groups of organizations have been gathered in your portfolio and ensure that these theoretical stocks are just a small part of your overall investments.

A word of warning

One thing that investors should be aware of before putting their money in penny stocks is that there is a lot of manipulation of price value by the trading agents in this market. At times, their activities can even cause organizations to leave the business.

While regular stocks are traded by the broker on your behalf, penny stockbrokers are free to make deals that are beneficial for them. It doesn't always happen that they are trading for your benefit.


It is true that deciding whether to invest in a penny stock or not is a critical decision. Before you decide to do so make sure that you do proper research on penny stocks so you know what you are opting for.

Identifying penny stocks and knowing about penny stock trading are important aspects of successful investments.


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