Penny Stocks are known to trade outside the major exchanges at prices that are low and they have a tiny market capitalization. These stocks are extremely speculative in nature and understanding the penny stock market is crucial before making any investment. In the Western Markets, the shares that are traded for one dollar are known as the penny stocks. It is true that penny stocks are risky, but a few of them have the capability to turn small investments into fortunes.
Detailed understanding of how the penny stock market works
As an investor, understanding the penny stock market is necessary. At times, they can change small investments into huge fortunes. A detailed understanding will help you before making any investment. For example, you can own 50,000 shares of the penny stock, and they can be priced at one dollar. In case if there is a rise in one dollar, it can give you 50,000 dollars in a day. However, this is not possible in case of a larger stock as it requires more capital for purchasing such a huge volume of the shares. There are many downsides to the penny stocks, as they can be manipulated, de-listed and scrutinized on a daily basis.
Understanding the risks associated with the penny stock market
A person can move stocks by purchasing many shares and create spikes without leaving hints to the average investors to understand whether this spike in the price is manipulated or genuine. It
is obvious that understanding the penny stock market will help you to decipher the risks associated. The penny stocks are not regulated by the national exchanges and this is one of the greatest reasons why they are prone to scams. Due to the risks associated with this market, the stock exchanges have categorized these stocks differently, and they are known as the trade-to-trade basket. The intra-day trading is not allowed within this category. All the transactions have to be settled daily. This, in turn, means that the shares have to be delivered or taken on the day they have been sold or purchased.
Things to know and understand about the penny stock market before investing
There are many people who have invested in the penny stocks and have lost money as the share price keeps fluctuating constantly. It is true that understanding the penny stock market is very important, but it might not be enough always. You should know diverse things before investing in the penny stock market.
- You should ensure that you are not only looking at the share price, but you are also keeping an eye on the value. The penny stocks can be available at low share prices, which will tempt the
investors to purchase the stocks. Before investing, you have to consider the values that are offered by these stocks instead of concentrating on the shares. Investors should make a proper assessment before making an investment in these stocks.
- There are penny stocks that can be traded at a low volume. If you want to sell these stocks, there are chances that you will not have buyers. This is why you should invest in the penny stocks that have a high volume, as it will allow you to liquidate if necessary.
- You should have an idea about the upper and lower circuits. The price of stocks cannot increase beyond a certain percentage, which is known as the upper circuit. When the stock price cannot be lowered below a specified percentage, it is known as the lower circuit. If you are an investor, you should know that it is not possible for you to double all your money within a short time, only because the stock has been locked in the upper circuit for a few days.
- The promoters and stockbrokers can manipulate the share prices as the penny stocks have low volumes. If the price reaches the upper circuit every day, it is obvious that it is being manipulated by someone. If you get positive news about any company and believe that the prospects are nice, you can make an investment without thinking if it is hitting the upper
circuit or not.
If you are a smart investor, you will know why understanding the penny stock market is significant. In order to protect yourself, you should trade the penny stocks that have been listed on the Nasdaq or American Stock Exchange, as they are regulated rigorously. Avoid trading the penny stocks, which have not been listed on the major exchanges.