Buckle up for an exciting ride

If you’re a beginner, penny stocks can be a good way to ease into the market as you can buy a variety of companies, achieving instant diversification, for a small cash outlay. Be prepared to make the effort to get it right:

•

Do your own research. Since these stocks are not tracked by many investors/traders, not many brokers provide analysis. Scrutinise everything you find about them and look for those with a unique idea or business model.

•

Plan a strategy and stick to it. First, decide which stocks you’re going to buy and how much you’re going to invest in each. Also decide when you’d sell if the shares were to fall and stick to it to avoid the “I’ll just hold a little longer and see if the price jumps back up” mentality, says finder. com.au. The same applies for gains.

•

Cheap doesn’t always mean value for money. Penny stocks may appear to be cheap compared with other shares listed on the ASX, but don’t base your investment decision purely on this, says finder.com.au. Always ask yourself why? It may be that there is little demand for the stock because other investors don’t rate it.

Benefits of investing in penny stocks include:

•

The ability to build a diversified portfolio for a low cash outlay.

•

The possibility of high growth if you pick the right stocks.

•

An exciting ride for investors with a high-risk tolerance as share prices can change significantly over little time.

•

Opportunities for active day traders due to their large price swings.

Downsides of penny stocks include:

•

They are high risk and not all companies that list on an exchange do well and a lot of penny stocks never become anything more than a penny stock, points out finder.com.au

•

They are highly volatile, often experiencing extreme price highs and lows within days, or even on the same day.

•

They rarely pay dividends because all revenue is usually reinvested back into the company to help it grow.