Penny Stocks: Stocks that are worth pennies
Want to understand what Penny Stocks are? Then you're in the right place!
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Penny stocks are assets that trade at very low prices – often for pennies!
The term became very well-known because of the film “The Wolf of Wall Street”, when the character played by Leonardo DiCaprio (Jordan Belfort, former broker who inspired the film) obtained very high profits from trading these assets.
But after all, is it worth investing in penny stocks? Are they advantageous in short-term operations?
That's what you're going to find out now! Keep reading for more information.
What are penny stocks?
Penny stocks are shares of companies that trade at extremely low prices.
In other words, in the financial market, penny stocks are shares with a very low price.
Typically, these are shares in companies that have little capitalization value or even that have already gone bankrupt and will soon close their doors.
It is important to mention that each country has a reference value to define this type of action. In Brazil, an asset is called a penny stock when its value is below R$ 1.
However, in the United States, the reference value is to be below US$5.
Furthermore, to have this definition, the action must have other elements, which go beyond its trading value.
It is necessary that the market capitalization (value of all shares added together) also has a low value.
How do penny stocks work?
These shares work like any other type of share traded on the financial market.
The difference, basically, is that there are some extra risks.
Because they have a lower value, penny stocks are traded less frequently.
They are also more volatile. But since they have extremely low values, any variation can have a significant impact on this stock.
Low liquidity increases the risk of investing in these financial assets. After all, since trades are not carried out frequently, the investor in question may have difficulty selling the asset.
What are the main characteristics of penny stocks?
With this information, we can state that the main characteristics of this type of action are:
• Low price: The word “penny” means something small. Indeed, these stocks are traded at low prices, but this does not always mean low valuation.
• Low volume: Anyone who invests in this type of stock runs the risk of not finding anyone interested in buying the share.
• Low liquidity: liquidity, in this case, is related to volume. Those who decide to invest in this asset are not always able to sell the shares at the right time.
• Extra risks: Due to the low prices, investing in these stocks is a little riskier than investing in other types of securities.
• High volatility: Depending on the case, extreme price fluctuations can even occur on a daily basis.
It is because of the risks involved that these assets tend to attract the attention of bolder investors, that is, they are willing to take risks, as long as there is a possibility of obtaining significant profits.
Beginner investors, or more conservative investors (who prefer safer investments) may suffer greater losses if they choose to invest in this type of stock.
How are penny stocks regulated in Brazil?
In 2015, the Brazilian Stock Exchange (B3) established several rules regarding these assets.
According to the regulations made in 2015, trading of these shares is not permitted and needs to be resolved.
There is a specific procedure. These shares are identified by selling the share for less than R$ 1 in consecutive trading sessions.
Without this happening, the Brazilian stock exchange notifies the issuing company to resolve the issue.
In this case, the company has 15 days to present a strategy that aims to increase the price of the shares.
Once the plan is approved, the financial market will be informed about the new measures.
Typically, the split or reverse stock split procedure is adopted to resolve this issue.
The inplit procedure occurs in cases where the trading value of the shares is extremely low. In other words, the procedure is carried out to adjust the nominal value of the share.
What are the main differences between a penny stock and a blue chip?
Now that you know what a penny stock is, it's time to compare it to a blue chip.
But after all, what is this?
Blue chips are stocks that have great liquidity in the bag. In other words, they are often highly sought after by investors.
These are securities issued by traditional companies with an excellent reputation. Furthermore, they play a relevant role in the market.
They are also known as “blue chip stocks.” For this reason, blue chips usually have high prices.
In fact, that's why they're called blue chips.
The name is a reference to the game of poker, in which blue chips are the most valuable.
In terms of profitability, there are also differences between penny stocks and blue chips.
Initially, penny stocks may seem more attractive. But in the long run, their profitability may show low returns.
A blue chip stock, if it is in fact well selected, can bring great returns in the long term.
What are the advantages of penny stocks?
As with any type of investment, there are advantages and disadvantages to investing in this type of stock.
The first advantage is the lots at affordable prices.
As you already know, we are talking about cheap stocks nominally, not in a value ratio.
This means that you do not need to invest a large amount of capital in purchasing these shares.
Furthermore, penny stocks have the potential to increase in value. In other words, they offer high profitability in a relatively short period of time.
In fact, as these assets are extremely volatile, it is common to obtain an appreciation of 100% in a single day.
However, before making any type of investment, it is ideal that you understand your investor profile, set financial goals and create a diversification strategy.
Conclusion
Penny stocks can even be considered interesting investment possibilities, as long as the investor is aware of the risks involved.
Furthermore, it is necessary to have realistic expectations when purchasing shares at such low prices and with the awareness that losses may occur.
