Are penny stocks a waste of money?

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Australian Economy, Macro Economics

Penny stocks are generally the ones that are famous for providing promising returns and tremendous growth over time and add to the investment diversification strategy. Valued generally at a price less than a dollar, the penny stocks have low market capitalisation which varies between $50 million and $300 million. However, the flipside with these stocks is that the risk is equally high, and an iota of a negative news can bring the stock down significantly. Nonetheless, investors looking for good returns do consider investing in penny stocks listed on ASX to make good money.

Trading in such small cap and low-priced stocks, projects growth due to the volatile nature of the market that fosters seasonality periods. However, one should have reliable information and proper strategy while investing in such stocks and choosing the ones that are quite attractive to give a good bounce to the portfolio needs a lot of research. It is also worth noting that small cap companies are usually start-ups with limited resources and small amount of net tangible assets as compared to blue-chip companies which are very much stable, and therefore the risk in investing in small companies is also proportionally high.

Few exemplary penny stocks include the likes of Battery Minerals Ltd (ASX: BAT) which has been up about 19% in last six months while the recent market volatility is making the stock drop (down 8.6% on April 03, 2018). Emeco Holdings Ltd (ASX: EHL) is another player that has gone up about 55.3% in last six months and was last trading at 28.5 cents as on April 03, 2018. Though these stocks are speculative and exposed to some market and operational risks, the stocks do have a decent growth potential based on their accelerated efforts. Thus, one can equate Penny stocks to lottery tickets which can help in converting small amount of money into massive returns.

Penny stocks are generally seen to witness sinusoidal movements with announcements made by the companies which can quickly impact the growth profile. These are high-risk investments and the prices get diluted with sudden selling in the market. Thus, if one doesn’t pay attention and fails to make an appropriate move given the volatile nature of the market, one can go penniless. While one sect of the market says that investing your hard-earned money in penny stocks can be a waste, the other says that invest in penny stocks if you hardly have any money or you want to build a huge pile of money. Nonetheless, one may want to bet depending on the risk appetite, but the real value of penny stocks needs to be estimated after looking into the financial reports, growth catalysts, historical performance, if available, and market scenario.


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