Many investors in penny stocks hope for their micro-cap companies to become profitable unicorns, but this is a rare occurrence. Despite the low prices of penny stocks, they actually carry higher risks compared to high-cap stocks traded on major exchanges, making it easier to lose money regardless of the investment size.
One major risk with penny stocks is the high price volatility. Due to their low prices, even a small change in the stock price can result in a large percentage gain. However, this volatility works both ways, as a small absolute loss can lead to a significant percentage loss, something that most investors may not be able to handle.
Another drawback of penny stocks is that they are usually unproven, opaque companies with limited track records. They often have lower reporting requirements, making it challenging for investors to conduct thorough research before investing. With mainstream stocks, investors have access to extensive financial data and reporting, but with penny stocks, investors may have to invest a significant amount of time in researching them.
Additionally, penny stocks typically have low trading volumes, meaning there are few buyers or market makers. This can make it difficult to sell penny stocks, even if they have increased in value. Without a willing buyer, investors may not be able to realize their gains, leading to potential profits only existing on paper.
Overall, investing in penny stocks can be risky due to their high volatility, unproven nature, and low trading volumes. It’s important for investors to carefully consider these factors before diving into the world of penny stocks.