Are Penny Stocks Worth It?

In a word, sometimes. In the stock market, there are no guarantees. Doing your homework about stocks you are interested in and developing a solid investment strategy can minimize your risk, but that risk will always be there.

The key to successful investing is to make that risk worth it.

You need to have the potential for profit that outweighs the risk involved. If you don't, then you are simply gambling with your money, so you might as well go and buy lottery tickets instead.

How Do You Typically Make Money By Investing In Stocks?

When you buy a stock you are buying a small percentage of ownership in a company.

Many people invest in stocks long-term. They buy stock in a company believing in the vision of that company and believing that over time, their stock will appreciate in value.

This is a relatively safe investment strategy provided that you have done your research on the company you are investing in.

Over time, if the stock appreciates in value, your investment grows.

You can sell your stock, and any amount that stock has appreciated over time will be your profit.

For example:

• Let's say you buy 100 shares of stock in a company at $20 a share, your initial investment would be $2,000.
• Ten years later, that stock is worth $25 a share, and you sell it for $2,500.
• You made $500 on this transaction, which is a profit, but a minimal one considering the amount of time it took, and the amount of money you invested.

How Do Penny Stocks Differ From Traditional Stocks?

First of all, penny stocks don't always cost a penny. They are called penny stocks because they are stocks because they are lower priced than typical stocks.

As a general rule of thumb, a penny stock is $5 or less per share.

Penny stocks are not typically stocks that you invest in as a long-term investment.

You don't buy shares and wait for them to go up over the course of many years, then sell them for a moderate profit. Instead, you invest in them for a short period of time, then turn around and sell them quickly with the intention of making a quick profit.

The biggest advantage of penny stocks has to do with their price.

With a lower price, you can buy many shares of a penny stock for what you would normally pay for a single share of a traditional stock.

Why is that important?

Well, let's illustrate this with an example:

• Let's say that you take the same $2,000 from the earlier example and invest it in a penny stock that is valued at $5 a share.
• That would give you 400 shares of that stock. If that stock goes up to only $5.25 in a day and you sell it, then you would sell for a total of $2,100.
• If that stock goes up to $5.50 a share instead, then you double your profit. If it goes up even more, then your profit continues to climb.

Again, this isn't much of a profit in this type of scenario. But, rather than waiting for a long time to make a little more money, you have instead made a good return in only a day.

Penny Stocks Are Generally Unstable

The reason that penny stocks offer such potential is the fact that they are generally speaking inherently unstable.

You won't find big, established companies with stock selling for such a low dollar amount.

Instead, you will typically find younger companies that are still in the process of trying to develop a long-term business plan. These are companies that have the potential to be successful, but since they are still far from reaching that goal the value of their stock is lower.

The problem with penny stocks and the fact that they are unstable is that they have the potential to fail that is higher than what you see in most traditional stocks.

When you invest money in an established company you can expect in most cases for the value of their stock to remain fairly stable.

On the other hand, with penny stocks, you aren't investing in a company with that kind of track record. So, the chances of that company not doing well are greater than what you would find in most traditional companies.

Pro Tip: Use a Stock Scanner for finding profitable Penny Stock Picks.

Can You Get Rich Off Penny Stocks?

If you want to make money quickly in the stock market, then penny stocks give you the best opportunity to do so.

You are essentially betting money that a company is going to take off and their stock will go up in value quickly.

If you have solid information about a company and believe that they are on the verge of doing great things, then this is a great bet to make.

Instead of investing a large sum of money for a long period of time to turn a moderate profit, penny stocks allow you to invest a little money for a short time, and potentially turn a huge profit.

Just remember, invest carefully and don't invest more than you're willing to lose, as the penny stocks do move QUICKLY! 

Does this mean that penny stocks are a bad investment?

Not necessarily. If you blindly invest your money into penny stocks there's a good chance you are going to lose money.

While that might seem scary, the truth is that if you blindly invest your money in anything there's a good chance you will lose money.

The difference with penny stocks is that the risk is heightened.

What does that mean for you? It simply means that you need to exercise some caution, and above all else, do your homework.

I suggest following Timothy Sykes Blog, he's a no BS kinda guy, and reguarly calls out scammers and bullsh*tters.

Don't buy penny stocks in a company until you have investigated that company extensively.

• How long have they been around?
• What kinds of products/services do they offer?
• Do they have a solid business plan?
• What sets them apart and sets them up for success?

If you can answer these questions before you invest your money, you will reduce your risk while also increasing the likelihood that you will earn a profit.