Interested in the stock market? Then you’ve probably found yourself wondering about concepts low cost assets before. A lucrative penny stocks list can represent an excellent opportunity for an investor that wants to make money quickly, without making a huge cost. However, before you can start making the most of these low-price shares, you’ll need to come to terms with how they work.
A penny stock is a small company’s share that often trades for less than $5 per share on the larger markets. While some of these securities will trade on larger exchanges like the Nasdaq or New York Stock Exchange, many will trade on over-the-counter environments which are much harder to regulate. Here̵
The Basics on Penny Stocks
For a long time, most traders refer to affordable shares as any that trade for less than a dollar on the exchange. The American Exchange and securities commission eventually modified the definition to include any share that trades under the price of five dollars – to match the rate of inflation. The SEC also defines penny stocks as somewhat riskier and more complicated than standard stocks or shares.
Learning how to invest in penny stocks is a lifelong tool that can pay dividends for years to come (excuse the pun!). Penny stocks typically come from smaller companies that have yet to make a lasting impact on the market. Unfortunately, these shares will often trade infrequently, which means that they don’t have a lot of liquidity. Investors often find it difficult to sell these assets because they might not be able to find a buyer when they need one most. Additionally, the lack of liquidity also mean that buyers end up dealing with wide bid-ask spreads and highly speculative investments. Though it is entirely possible to make money trading these stocks, it’s also possible to lose a lot of your money in one go with this kind of asset.
Why Do Penny Stock Prices Fluctuate?
While all asset prices fluctuate over time, these securities are often considered to be more volatile than most. Part of the reason for this is that these shares come from growing companies that have limited resources and cash. The assets that come from primarily small companies are intended for traders that have a high tolerance for risk, as a small business can suddenly lose everything and go bankrupt – presenting a higher level of risk. Smaller businesses are also affected more drastically be unexpected changes in the marketplace.
The heightened risk levels associated with investing in penny trading means that investors need to take specific precautions to protect themselves. For instance, individuals might need to implement a stop-loss order before entering a trade, and they’ll need to know what kind of price level they should be exiting at if the space starts to move in the wrong direction. Stop-loss orders that trigger the automatic sale of smaller securities can be one of the easiest ways to protect yourself.
While penny-level shares can have a lot of explosive movements, it’s important to be realistic when it comes to making your investments into this kind of security. Ultimately, penny stocks are high-risk investments that don’t have great trading volumes. You’ll need to consider them carefully when building out your portfolio.