Penny stocks are one of the most appealing investments in the market, even if you have a limited knowledge of them. Unfortunately, there are still a number of people who are not aware of this investment category and may therefore be tempted to invest in them. Here are some tips on how to distinguish good penny stocks from those that will eventually ruin your bank account.
It is important that you understand the difference between a penny stock and a share of a larger company. A share of a company has the ability to raise money by issuing new shares. The price of these shares will gradually increase over time, while the value of the shares will remain the same. A penny stock on the other hand, will not increase in value as it is worth less than the price of one new share issued by the company.
You will also need to keep in mind that a penny stock is generally more volatile than a share of a large company. This is because it has fewer financial resources to devote to dividends, which mean that any profits made by the company will be concentrated in the short term. This means that the value of the share can rise quickly, but the price will fall quickly.
There are also many instances where shares of a company will not actually issue new shares at all. In such cases, the company simply extends the number of shares that it holds onto others who buy it.
If you are interested in investing in penny stocks, it is also important to understand the risks associated with them. A stock may be worth its value on the first day but quickly depreciate, especially if it is traded on an over-the-counter market.
One of the risks associated with stocks is that they can fall through some unforeseen circumstances. The odds of a company being taken over by a larger company is also higher than in the case of a small company. This is because the value of a share of a large company is known, whereas the value of a small company’s shares is open to question.
Finally, when it comes to investing in penny stocks, you should always do your own research. It may seem like an easy thing to do, but in reality, doing so can save you a lot of time and money. There are many people who mistakenly believe that everything they read in the newspaper is correct, so it is important to do your own research before deciding on which penny stock to buy.