Penny stocks are not necessarily stocks that sell in the penny range; they are stocks that sell for less than $5 per share. This makes them an attractive investment for many people, but particularly those who are new to the trading game and do not want to risk a huge sum of money while they are learning the basics. That being said you should know that the risks are high and the potential for return is largely unpredictable. The following is meant to help you gain a better understanding of the difference between penny stocks and expensive stocks. By knowing the inner workings of each one you will be able to decide for yourself which option is best for an investor based on their level of experience and budget.
On the other end of the scale, you have expensive stocks from major companies; these stocks range anywhere from $10 per stock to several hundred or even thousands of dollars. The reason these stocks are so much more expensive is usually based on the company behind the stock and the products or services they provide. Investors seek out proven companies that have a long track record of profits, good management and a host of other measurable variables. Penny stock companies rarely have this type of history to bank on. Instead, they operate on working to produce a new kind of service or bettering an already existing product. For example, a lot of penny stock companies are attacking new areas of science such as green energy and alternative energies. These younger stocks have the potential to reach enormous heights in a short period of time.
Because these companies often have such a small cap and also such a low price, penny stocks can rocket up 100% or more very quickly, which is something that larger companies stock cannot do. This is a reason why people invest in these stocks and also trade them heavily, because the return can potentially be gigantic. On the flip side when investing in penny stocks, we must be careful to do our own due diligence and research before investing so we know what we can expect from the company. That being said, penny stocks are more volatile because of small capitalization as well allowing the stock to shoot up quickly, but also suffer some quick drops.
As you can see, there is a vast difference between penny stocks and traditional or more expensive stocks. There are perfectly valid reasons a person would decide to play with the penny stock market, including risking small amounts of money while shooting for instant wealth.
Penny stocks are also a great vehicle for learning how trading works and getting familiar with terms, the trading process and more. The swings of penny stocks also make them more fun for active investors and they are cheap enough that you do not have to bet the farm to enjoy them.
Penny stocks and more expensive stocks have many differences, but each can play a role in your investment portfolio.