How to Get Started Investing in Penny Stocks

Investing in penny stocks can be lucrative, but it can also be risky, which is why many traders avoid penny stocks when looking for cheap stocks to buy.

What Is a Penny Stock?

The vast majority of penny stocks originate from untested small companies that don’t have any past performance to accurately judge their performance on the market.

How Penny Stocks Work

Penny stock trading works best when you focus on a short-term investment that allows you to get in and out quickly.

What Is the Risk in Trading Penny Stocks?

The following are some of the most prominent risks that traders need to recognize before diving into the penny stock market.

Limited Liquidity

Large businesses tend to be very liquid, with many shares being bought and sold all the time.

Companies Are Unknown

Alongside having few shares, several penny stocks come from companies with little to no track record. Even if they look good on paper, these ventures have yet to prove themselves in the real world.


Although fraud on NASDAQ or the NYSE is relatively rare due to stringent regulations that a stock must follow, scams are much more prevalent on the OTC.

Small Market Capitalization

OTC stocks tend to have a very low market capitalization, with most small companies on OTC trading platforms valued at under $300 million.

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