You’ve probably heard about the benefits of penny stocks. They’re among the lowest barriers to entry of all investment vehicles. Yet, they still offer the potential for massive returns – which is why they’re considered some of the best starter stocks.

But as with all stock picking strategies, you need to be aware of the disadvantages of penny stocks too. They can be highly volatile stocks which can also be a bad thing given their lower liquidity. You might find yourself getting “stuck” in a position, unable to offload shares in time.

There are also concerns surrounding the lack of transparency with penny stocks along with fraud risks. So, are penny stocks worth it? Should I invest in penny stocks or stick with something safer, like the best blue chip dividend stocks?

We’ll break down the pros and cons of penny stocks below to leave you with complete clarity on whether or not these stocks align with your goals or not. Then, we’ll share a few investing tips for beginners to help you hit the ground running.

Just know this, though – almost all the penny stocks disadvantages can be mitigated to some extent when you follow a sound strategy and utilize the best app for penny stocks.

VectorVest’s stock advisory removes human error and guesswork from your decision-making, empowering you to win more trades with less work. Try it today and see why it’s the best stock picker app for beginners and seasoned traders alike!

Overview of Penny Stocks

Let’s clear up a common misconception before we get into the pros and cons of penny stocks. These don’t necessarily have to be stocks trading for pennies. Rather, they just need to be trading at a low cost per share, typically under $5.

These stocks are associated with newer or less-established businesses operating in niche industries or emerging markets. But sometimes, they’re an established company that’s fallen from grace.

Either way, their lower price points make them popular entry points for investors with limited capital. They can sometimes be found on major exchanges such as the NASDAQ and NYSE, but are more commonly traded on over-the-counter (OTC) markets, like OTCBB or Pink Sheets.

But, they’re not always the best investing strategies for beginners. Transparency into financials or even business operations can be limited since the companies behind the stocks are often in the early stages of development, struggling financially, or operating within specialized industries.

Penny stocks are also traded at a lower volume, which can make it difficult to buy and sell these assets at your desired price. This means they’re a high-risk, high-reward investment. So, are penny stocks worth it? Let’s get into the benefits and disadvantages of penny stocks below.

Are Penny Stocks Worth It? Pros and Cons of Penny Stocks

There’s no one-size-fits-all answer to questions like, should I invest in penny stocks? All we can do is provide you with the facts and let you make the right decision based on your investment goals, time commitment, and risk tolerance.

That being said, are penny stocks worth it? Here’s what you need to know about the pros and cons of penny stocks, starting with their benefits.

Benefits of Penny Stocks

Learning how to make money with penny stocks is compelling for beginners especially, and it’s easy to see why. The benefits of penny stocks are impossible to overlook:

  • Low Cost of Entry: You can find penny stocks under 10 cents, allowing you to buy large quantities of shares with limited capital. This is the most accessible entry point for beginner investors looking to diversify without a huge upfront commitment.
  • High Percentage Gains: Their low price also means penny stocks can deliver outsized percentage gains even with minor price movements. For example, a stock moving from $0.50 to $1 represents a 100% return. Opportunities like this are rare with larger, established companies, like the best stocks for Roth IRA.
  • Opportunities in Emerging Industries: These aggressive growth stocks are tied to smaller companies in innovative or high-growth sectors. Identifying a company on the verge of success can lead to substantial rewards that other investors might overlook.
  • Flexibility in Trading: There are so many ways to trade penny stocks, like day trading or swing trading since their high volatility provides frequent trading opportunities. But, these aren’t just great short-term stocks to buy. You can bet on the long-term too if you like an emerging company’s prospects!

Disadvantages of Penny Stocks

Don’t let the benefits of penny stocks blind you to their shortcomings. You need to know about the disadvantages of penny stocks as well before determining if it’s worth trying this strategy:

  • High Volatility and Risk: Those wild price swings in short timeframes that present buying opportunities also create a high-risk environment. While this volatility can lead to large gains, it equally exposes you to significant losses. This is especially true considering liquidity challenges…
  • Low Liquidity: Most penny stocks have limited trading volume, meaning there may not always be enough buyers or sellers when you want to execute a trade. This can make it difficult to enter or exit positions at a desired price. You might get “stuck” in a position and forced to face massive losses or miss out on big profits.
  • Lack of Transparency: Smaller companies often have fewer financial disclosures and less rigorous regulatory oversight. It can be tough to assess their true value or potential without getting inside knowledge somehow.
  • Susceptibility to Fraud and Manipulation: Penny stocks are more prone to pump-and-dump schemes. This is where prices are artificially inflated by bad actors, only to crash once they sell off their positions. It’s very similar to “rug pulling” in crypto. This leaves investors who are out of the loop holding the bag with significant losses.
  • Over-the-Counter Market Risks: OTC markets where penny stocks are traded are less regulated than major exchanges. Again, this lack of oversight can be tied to financial reporting inconsistencies and increased risks.

So, Should I Invest in Penny Stocks?

So, are penny stocks worth it or not? Hopefully you have a better understanding of the pros and cons of penny stocks, and more importantly, which side of the fence you fall on.

Penny stocks are absolutely worth it – for the right investor, that is. If you’re comfortable with higher levels of risk and understand the volatile nature of these investments, they can be a great option.

Just be aware of the time and tools needed to be successful with swing trading or day trading penny stocks. There’s a lot more that goes into investing in these speculative opportunities than, say, the safest dividend stocks.

On the other hand, those who prioritize stability and predictability over massive returns might not find that the juice is worth the squeeze with penny stocks. They also require much more time spent in front of a screen actively monitoring trades or looking for new opportunities.

The truth is, there are plenty of great established companies you can invest in at a low price, too. Some of the best stocks right now are priced at a bargain of under $10. You just need to dig deep to find these opportunities. But, they’re much more stable and have higher volume.

All that being said, we mentioned from the get-go that the disadvantages of penny stocks can be minimized with the right strategy and the best investment apps for beginners.

So, let us share a few tips on reaping the benefits of investing in penny stocks without exposing yourself to unnecessary risk or spending too much time in front of your screen.

Tips on Reaping the Benefits of Investing in Penny Stocks While Limiting Downside

Successfully investing in penny stocks requires a blend of knowledge and technology. You need to know what to look for in picking a stock, how to time your entry and exit, and how to mitigate risk at every step.

Understand the Characteristics of Good Penny Stocks

Just like with falling stocks to buy or the highest paying dividend stocks, not all penny stocks are worth your attention. You should narrow your focus to stocks with:

  • Strong Financials: Even if they’re small, look for companies with improving revenues, manageable debt, and positive cash flow.
  • Clear Business Model: Avoid companies with vague goals or operating in unproven industries. Investors (you) are left holding the bag when these businesses go belly up.
  • Market Demand: Target businesses in sectors with growth potential, such as technology, renewable energy, or healthcare.
  • Volume and Liquidity: Stocks with higher trading volumes are easier to buy and sell without significantly impacting the price. This is perhaps the most important thing to consider so you don’t get stuck in a position or have to sell outside your desired price.

So, how do you actually go about finding these stocks? Simple – you need to learn how to combine fundamental and technical analysis.

Do Your Research and Analysis

Finding viable penny stock trading opportunities isn’t rocket science. You can build a stock screener based on your own criteria that brings penny stocks with potential right to your fingertips on a daily basis.

Always take your time to review a company’s annual reports, quarterly earnings, and any press releases for insight into operations before you buy it. You should also pay attention to what’s being said about the stock online. Market sentiment is not something to overlook.

Aside from doing your fundamental analysis, doing technical analysis helps you figure out when to buy the dip. You can use the best stock indicators to spot patterns that could indicate future price movements. Look for key levels of support and resistance.

Stay up to date about upcoming events associated with the company you’re eyeing, such as product launches, earnings announcements, or new partnerships that could drive demand. Our blog has more tips on how to find stocks to day trade or how to find undervalued stocks.

Use Risk Management Strategies

Once you’ve found a stock to trade the challenge lies in figuring out when to buy it and when to sell it. This is where most of the disadvantages of penny stocks come from.

Investors buy too early while the stock hasn’t cemented its upswing. We always see investors miscalculating their exit, too. They either sell too early and miss out on additional profits or sell too late and miss their window altogether, watching a winning stock turn into a loser.

All of this can be avoided with risk management. Set automatic sell triggers to prevent your losses from snowballing. For example, if a stock drops 10%, your stop-loss order will sell it automatically.

The same applies to take-profit orders. Lock in gains by setting an upper price limit at which your stock will sell. These strategies remove you from the decision-making so you don’t let emotions cloud your judgment.

Make sure you’re thinking about position size as well. Start with small positions to gain experience and keep your losses small.

In general, you should only allocate a small portion of your portfolio (like 5%-10%) to penny stocks. The rest should be allocated towards more established, stable companies with a solid track record. Penny stocks are fairly speculative, so don’t rely solely on them.

Leverage the Right Tools

The best way to avoid the disadvantages of penny stocks is to work smarter and leverage the right software. That’s where the VectorVest stock analysis software comes into play. It’s the best stock apps for iPhone and the best stock apps Android alike!

The system has been fine-tuned over the past few decades to help you win more trades with less work and stress. It charts and ranks 18,000+ stocks daily, providing a clear buy, sell, or hold recommendation for each one of these based on real-time data.

You don’t need to waste your time or deal with the complexity of technical analysis vs fundamental analysis. VectorVest boils everything down into 3 simple ratings: relative value (RV), relative safety (RS), and relative timing (RT).

Each sits on an intuitive scale of 0.00-2.00 with 1.00 being the average, allowing for effortless interpretation. Just pick safe, undervalued stocks rising in price to win more trades!

Whether you’re trying to reap the benefits of penny stocks, investing in blue chip stocks or searching for covered call stocks, VectorVest also has a list of different stock screeners so you never have to look far for your next opportunity, either.

If you’ve decided that the pros outweigh the cons of trading penny stocks and you’re ready to get started, set yourself up for success with VectorVest. A free stock analysis is a click away!

Closing Thoughts on the Benefits of Penny Stocks

So, are penny stocks worth it? After reading this overview of the pros and cons of penny stocks, we hope you have a clear understanding of whether or not this strategy aligns with your investment goals, risk tolerance, and time commitment.

The benefits of penny stocks are undeniable, but you need to take the downside into account as well. If you don’t mind a bit of risk and hard work, you can find some really lucrative opportunities with penny stocks.

Learn more about how to build a stock portfolio, how to make money trading options, best day of the week to buy stocks, online stock classes, can you buy and sell a stock in the same day, free stock analysis websites, best MACD settings, or are financial advisors worth it in our blog.

Otherwise, the only thing left to do today is discover firsthand how VectorVest’s stock advisory software can support your investment journey. No matter your strategy, the system can guide you towards more profitable trades while saving you time and stress.

Get started now and make smarter penny stock trades with VectorVest!