Penny stocks are an attractive investment option for investors interested in making a large return in a short time frame. Penny stocks are an easy way to turn a small investment into a large payout, but it’s not without risks. Investors typically lose money by investing in the wrong stocks, at the wrong prices, and for the wrong reasons. The share price is usually less than five dollars per share because a company’s revenue is decreasing.

What are penny stocks?

Penny stocks are usually linked to small companies, those with limited history, or companies with a dire financial history. They aren’t traded on a major stock market like the NYSE or NASDAQ. Investors trade these stocks on the over-the-counter (OTC) market. You don’t need a lot of money to start investing in penny stocks. A minimum investment of $500-1,000 is sufficient to get a comfortable start in penny investments.

There’s no best stock to invest in, but some stock picks are better than others. A wise investor always performs due diligence before committing to an investment. Penny stocks have a higher trading volume than regular stocks which makes them perfect for day trading. It helps to have some reliable investment advice when determining which hot stock picks are best for your investment goals.

Wealth Rocket offers its picks for the best penny stocks on the Toronto Stock Exchange (TSX), TSX Venture Exchange, Canadian Securities Exchange, and NEO Exchange. Their watchlist of tech penny stocks includes 5N Plus, American Lithium, CloudMD, Exro Technologies, and Drone Delivery Canada. Penny stocks are a good option for traders with experience who can handle the risk and volatility of this investment type.

Penny stocks do have some risks.

Choosing to trade penny stocks comes with significant risk. Penny stocks are investments in smaller companies with less impressive financial results than larger, publicly traded companies. There’s a high level of volatility because penny stock companies haven’t proven they can succeed. Stocks on major exchanges like the NYSE and NASDAQ are subject to more rigorous reporting requirements than stocks traded in the OTC market. Penny stocks have a lower trading volume and are more illiquid, which results in a broad range of bids and ask prices.

There are a lot of schemes when it comes to penny stocks which is why due diligence is important. The more hype a stock has, the higher its share price. Some traders mistake a high share price as a sign of a strong company and buy into the hype. Scammers then sell their shares for a profit and stop hyping the stock, which causes the share price to decline and traders to lose money.

Be smart when investing in penny stocks.

There are several smart investing tips to keep in mind before you buy your first penny stock. Determine how much money you can afford to invest, then think about how much you can afford to lose. Setting an investing limit helps you avoid financial trouble if your penny investment goes under. Avoid paying commissions whenever possible. Most brokers don’t charge a commission on stock trades but beware of special fees for stocks with low share prices.

Don’t rely on information from the company or stock promoters alone. If your due diligence doesn’t result in any third-party information about the company, it could be a scheme. Penny stocks aren’t meant to make money over the long term. Traders have to be diligent with short-term moves and be willing to act on intuition and not just the relative strength index to see a profit.

Penny stocks are a potentially lucrative investment option for traders with a high-risk tolerance.