Penny Stocks – the Benefits and Risks
Financial experts keep stressing the advantage of passive income over active income. Sources of active income include salary, commissions and other cash benefits. Passive income comes from one’s investment such as dividends from financial assets, direct business or real estate properties. In terms of investing in the stock market however, are penny stocks worth a shot?
Penny stocks refer to listed companies in the American Stock Exchange that are trading less than $3 each. It is also known as micro cap equity as clearly defined by the US Securities and Exchange Commission. These low-priced shares have both positive and negative impacts to investors. Positive in a sense that capital appreciation takes place in smaller period of time. Negative due to fluctuating values. Experienced investors are rarely drawn into penny stocks as opposed to amateurs who are easily attracted by penny stocks because they can be easily acquired with smaller amount of money.
Micro cap equities are generally volatile and the sudden increase in value in a shorter period of time can be overwhelming. Even if it has greater upside potential in a percentage basis, conservative traders still associate it to lesser security. Smaller stocks are also believed to give smaller returns in the end. Most of the time, it will also result to negative earnings or negative book values.
The fact is, the vast majority of penny stocks do not pay dividends which scares off some investors. However, with the current trend in the stock market new investors are becoming more interested with penny stocks. Despite the high risk factors, these people play along with the rapid growth of their investment. Day trading pink sheet penny stocks are more applicable to online traders than long term investors. Traders can buy and sell stocks within a day because they have the luxury of time to monitor their shares while investors are after the long-term rewards of their investment.
As an investor, one must be ready to take calculated risks. Penny stocks are like double-edged sword. They can either give you a very high reward or drag your investment into a dramatic fall.
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