Penny stocks are a low-cost option to diversify your assets and have the potential to grow in value over time. However, they are also relatively hazardous investments because the firms are typically tiny, unestablished, and competing against other enterprises in their sector. But hey, who does not root for the underdog?
Let’s take a look at the world of penny stocks and why you might want to have a look at them.
What Are Penny Stocks?
The phrase “penny stocks” refers to inexpensive, low-priced shares of small, generally newly-listed businesses. Although there are dangers associated, investors are typically drawn to penny stocks because of their low pricing and the hope that they will go up considerably.
A penny stock is usually used to refer to a small company’s stock that trades for less than $5 per share. This may vary between countries, however: in the UK, the penny stock threshold is usually £1, for example. If the company’s entire market valuation falls below a specific threshold, a penny stock may slightly exceed these levels.
Penny stocks tend to be associated with small firms that have a lack of liquidity, which means that there are few willing buyers in the market. As a result, investors may have difficulty selling shares since there are not enough buyers. Investors may have difficulties obtaining a price that correctly reflects the market due to the limited liquidity.
The Risks of Penny Stocks
Penny stocks often reflect fledgling enterprises with minimal funds and resources. Because they are typically small businesses, penny stocks are best suited for investors with a high-risk tolerance.
Penny stocks often have a higher degree of volatility, resulting in a bigger potential for profit and, consequently, a higher level of inherent risk. A penny stock investor may lose their entire investment, or more if they buy on margin, which implies the investor borrows cash from a bank or broker to purchase the shares.
Do Penny Stocks Pay Dividends?
Usually, penny stocks do not pay dividends, as penny stock companies are either small businesses with little income or larger businesses in financial distress. However, there are a handful that pay dividends, and investing in penny stocks giving dividend can minimize a penny stock portfolio’s total risk exposure.
One simple way to find dividend-paying penny stocks is to conduct an online search using terms like “penny stocks that pay dividends” or “list of penny stocks that pay dividends.” The search engine results should offer a sample list of penny stocks that pay dividends.
Another option is to make use of a stock screener, which allows an investor to first search for penny stocks by adding a filter of a maximum stock share price of $5 per share. The investor may then apply an extra filter to the resultant stock list, limiting it to firms having a dividend payment ratio larger than zero. An investor might refine the search by including other criteria, such as only penny stock businesses that have earned earnings or profits as well as dividends.
It is critical to remember that a corporation must have made a profit over multiple quarters or years in order to have enough retained profits or cash saved to pay periodic dividends.