Can you get rich with pennystocks? – Many investors dream of finding a pennystock that is the next Amazon, Google or Apple. After all, even the biggest companies have to start somewhere.
Pennystocks are inexpensive stocks, some of which have unlimited market potential and allow investors to invest in a wide variety of industries without having to shell out thousands of dollars or euros. Therefore, in this article we want to deal with the question: „Can you get rich with pennystocks?“
Due to the low strike price and the associated market and return potential, penny stocks represent an attractive investment opportunity for investors with a high risk tolerance. However, these profit opportunities are associated with equally high potential losses.
Of course, it is important to understand the risks before investing so as not to make reckless decisions that could lead to large losses.
Features of penny stocks
If you ask investors what they think of when they hear the term pennystock, you’ll probably get the answer most of the time that it refers to stocks that trade below a dollar or euro. However, the U.S. Securities Exchange Commission (SEC) has expanded this definition. Therefore, it also includes stocks that trade under $5 per share.
However, there are other characteristics that penny stocks of many companies have in common.
- Most penny stocks are issued by companies with small market capitalizations. Market capitalization is the total dollar or euro value of outstanding securities issued by the respective company.
- There are some penny stocks that are traded on the major exchanges, such as the New York Stock Exchange and Nasdaq. However, the majority of these stocks do not meet the minimum requirements for listing on these exchanges. Thus, you need access to an over-the-counter (OTC) exchange if you want to buy these stocks.
- Since pennystocks are usually securities of smaller companies, demand for them is not as high as it is for stocks listed on major exchanges. This can make it more difficult to sell your stocks again.
Even if this does not sound very positive at first, there are many reputable penny stocks. Nevertheless, when investing, you must be aware that these low-cost securities are sometimes notorious for price manipulation and so-called pump-and-dump schemes. Therefore, you should do your research before investing and only put a small portion of your total capital into pennystocks.
If you want to know how to find the cheap stocks and choose suitable ones, then also read our post „How to find penny stocks? “.
In our article „What are Penny Stocks? „you can also find out basic information about these low-cost stocks.
"Penny stocks" that would have made you rich
At a price below $5 dollars per share, it may be rather unlikely that the respective small company will turn into a huge one worth millions or billions. But every company has to start somewhere. Let’s take a look at formerly inexpensive stocks that made early investors a lot of money over the course of time.
- Amazon: One of the largest companies in the world actually once traded for less than $5 per share. In fact, factoring in stock splits, you would have paid just $1.50 for a share of Amazon stock when it went public. Today, an Amazon share is worth about $3000. So if you had invested $100 in Amazon stock back then, you would be able to sell it for $200000 today.
- MonsterEnergy: This company went to market with a price of only $0.10 per share. Today, the price of this stock is beyond $80 dollars. So if you had invested just $10 dollars in Monster Energy in 2003, you could sell your stocks for $8000 today.
As you can see, even low-cost stocks (small companies) have the potential to generate massive profits. And so many investors have already achieved great returns by investing strategically in the right places.
Can you get rich with pennystocks? - The volatility
The market for penny stocks is very volatile. While prices can go up extremely quickly, they can go down just as quickly. This means that trading involves just as much risk. Of course, this risk is often in direct proportion to the potential profit.
But precisely because the cheap securities are so risky, many investors stay away from them. This should make it clear that investing in penny stocks should always involve extensive research.
Can you get rich with penny stocks? - The opportunity through low prices
One of the most prominent advantages of penny stocks is their low strike price, which can provide incredible potential returns. Some of these securities cost a few euros or dollars, others even just a few cents. Thus, we come back to the previous example. So if you spread just a few dollars or euros over different pennystocks, you have the opportunity to take high profits.
However, you should be aware that this does not happen overnight, but can take a while. In our examples, it was a period of almost 20 years.
Conclusion
Penny stocks naturally offer a certain appeal due to their low price, as the market potential seems virtually unlimited. However, it should always be kept in mind that these stocks are mostly smaller companies with a low market capitalization and often low demand. Also, the risk due to so-called pump-and-dump schemes should not be disregarded.
So in order to successfully invest in penny stocks, we highly recommend you do your research. How to find a suitable penny stock is explained in our article „How to find penny stocks? “.