Whether To Buy Penny Stocks or Not

Whether To Buy Penny Stocks or Not

To buy penny stocks or not to buy penny stocks. That is the question. OK, it is not exactly Hamlet but it is a question that many traders ask themselves at some point in their trading life. If you are not a trader then I can answer the question for you rather simply. I would avoid penny stocks is you are a buy and hold investor. Maybe the only exception that I would make would be companies like Citigroup that find itself in the land of penny stock status. If you believe they have the ability to return to their former glory then you should consider buying penny stocks.

However, the question of whether to buy penny stocks (or to sell penny stocks for that matter) is really one for an active trader. Penny stocks don’t present you with the greatest of fundamentals so of necessity they are more trading vehicles. Make your profit and get out and visit them sometime again in the future when they look attractive for a short term gain.

I am going to make a case to buy penny stocks. There are many reasons that cause me to come to this conclusion, however, for the sake of brevity I would like to focus on just three. Let’s dive in.

Penny stocks are volatile. If you are a trader you know that you need stocks to trade that are volatile. It will not do you much good to spend your time trying to trade some $50 company that moves in a range of 15 cents each day. Stability may be great for long term holds but it won’t help you out if you are a trader. Why are penny stocks so volatile? Simply because the slightest news can be something very beneficial or negative for the company. Most penny stocks are in a make or break mode. You can use this in your favor.

Penny stocks are cheap. Cheap penny stocks help the active trader in the sense that he/she can buy many shares of a company rather than a few hundred. Let’s look at a little example. If you were to buy 200 shares of a $50 stock, it would cost you $10,000. This same $10,000 could be used to buy 5000 shares of a $2 stock. Now if each company would move 20 cents you would make $40 on the higher priced stock and you would make $1000 on the penny stock. That is not a bad chunk of money. That is the power of penny stocks.

The final reason is that penny stocks can make large swings in very short period of time. This is due in part to their volatility. The swings that penny stocks can make are massive on a percentage gain basis. It is quite common for penny stocks to move 10% in a given day. That is something that you cannot get out of higher priced stocks. In other words, penny stocks give you great bang for your buck. So if you are contemplating where or not to buy penny stocks I would suggest that you give them a try. Just learn to be a disciplined investor. You can find other articles on this website that will give you pointers on how to do this.