I do not normally advise people to buy penny stocks. This is a high-risk class of equities. If you are trying your hardest to be a buy and hold investor with the RobinHood phone app, then you will naturally avoid such stocks. This is also generally a good idea for any new investor.
However, as time goes by, your portfolio is going to grow. Even if you are just investing $25 or $50 at a time, you will soon have a portfolio with thousands of dollars worth of stocks in it. If you are smart about your investments, then you will be trying to diversify your holdings. If you buy penny stocks in limited quantities, you can increase diversification and the possibility for gains while taking very little risk.
The Advantages of Buying Penny Stocks
Let me begin by warning you about penny stock investments. Never let this type of investment occupy more than a few percent of your total stock portfolio. If you adhere to this principle, your adventures in these risky equities will never cause you much harm while they may bring great rewards.
A penny stock is generally one that costs less than a dollar per share. though some traders expand their classification to include shares under $3 or even $5. Others might consider whether or not the stock is traded on the major stock exchanges or in the OTC market. OTC stocks carry much more risk because there is little to no transparency with regard to their business model and activities.
Regardless of how you define them, penny stocks possess a mathematically undeniable power to generate significant earnings for investors. Imagine a stock that sells for just 10 cents per share. It only takes an increase in the value of just one penny to create earnings of 10%.
That single penny does not sound like much, but the low price of these stocks allows you to buy many more shares than you may be accustomed to buying. For just $100, you could own 1,000 shares. That one penny increase earned you $10 in just an instant. Since you do not pay for your free stock trades with the RobinHood phone app, you can make some easy money from these maneuvers.
Dangers of Buying Penny Stocks
As wonderful as this sounds, I should warn you about the actual risks involved in these equities. If all scenarios worked out as beneficially as the one that I described above, then everyone would invest in these stocks and they would no longer be penny stocks. High demand creates high prices.
There are often good reasons that penny stocks cost so little. They may have poor fundamentals, be poorly managed, suffer from high debt or just an unfortunate change in the economy. They do not generally soar in value. Any given blue-chip stock is much more likely to hold its value and generate dividends than your average penny stock.
These low-priced stocks are also much more likely to take your whole investment down with them. Remember that 10 cent stock that I mentioned? It is much closer to 0 than anything else. It does not have to lose much value to disappear entirely.
How to Buy Penny Stocks Safely
You should treat these investments like you would any other. Do your research into the companies. Some penny stocks are only so low-priced due to circumstances that can be turned around. Bank of America lost a ton of value during 2008 and 2009. dropping down to just a few dollars per share. Any sharp investor knew, though, that this was a temporary setback. BAC was not going anywhere. Now the stock is worth nearly $18. Investors who were smart enough and patient enough six years ago have made a lot of money.
When you can find a company that shows such promise. a penny stock investment can be very profitable. The RobinHood phone app gives you access to several penny stocks available on the NYSE now.