It’s possible to gain on any stock, and experienced day traders might choose to use penny stocks to take advantage of volatility in the market. But penny stock investing and trading comes with risks. Of course, these risks have to be considered by any investor, which is why we’ll cover the advantages and disadvantages of trading penny stocks in this article. Moreover, we’ll give you insights into how to improve your trading skills and whether penny stock trading is worth your time and effort.

What are penny stocks?

Penny stocks are usually valued under $5 and are not listed on any major exchange like the New York Stock Exchange, for example. However, these companies are popular among investors due to their high growth potential and speculative nature, which offers higher returns.

Why should I trade penny stocks?

The highly speculative nature that can reap high returns on investment is one reason to trade penny stocks. In addition, increased volatility in penny stocks makes them an exciting option for day traders. Still, there are many disadvantages to penny stocks and traders need to be wary. How do I trade penny stocks? It’s difficult to apply any fundamental analysis to penny stocks as little is known about the company and results are often volatile or highly speculative. The preferred method is to trade penny stocks and become an expert in the market, which is complicated as there are many pitfalls when it comes to trading penny stocks.

Disadvantages of penny stocks

The lack of data about penny stocks makes fundamental analysis problematic and, therefore, makes any penny stock investment somewhat speculative unless there is insider information. In addition, low market prices lead to low capitalization and inferior liquidity makes it slightly more difficult for shareholders to withdraw their cash funds. When investing in penny stocks, liquidity is critical because there are numerous reasons why a shareholder may seek to dissolve their assets from the company. As a result, companies with lesser volumes may see a considerable drop in liquidity. Penny stocks can also be subject to fraud and should be approached with care. Traders should be careful not to fall for pump and dump schemes and fraudulent insider information.

So, should I trade penny stocks?

It’s difficult to say. When trading penny stocks, you are dealing with significant risks, and you could be subject to losing your entire investment. Lower volumes make it more difficult to trade, but volatility is high. However, if you find a strategy based on technical analysis that seems to work, you’ll increase your odds of turning a good profit.