Everyone is well aware that Penny stock is arguably the riskiest segment of the capital market. In the recent 12 months, it has been experiencing surge continuously. Moreover, on specific days the volume of shares reach almost double their average. For most investors, it can be both an opportunity and a threat. Thus it is advisable to know some things about it.

In this article, we have discussed some points that you should know before buying surging penny stocks. This will help you avoid surprises in future. No matter what the financial advisers suggest, you can make your own decision.

What is a penny stock and its qualification?

In a western market, the shares that are below 1 dollar usually fall under penny stock. However, the category also includes stock that is under 5 dollars. Penny stocks are indeed risky, but some of them are capable of turning even a small investment into a fortune. For instance, According to stockapps if you own a number of 50,000 shares of 1 dollar, it can rise to 50,000 dollars in a single day.

Some of them have made their way in two significant indices, i.e., New York Stock Exchange and Nasdaq. In the US financial market, they are also known as "Pink sheet" as a reference to the colored paper used before in electronic trading days.

Many experts and intelligence reports say that penny stock is appealing since it allows people to buy companies without investing much. Though, in recent days, it has shaken up this dynamic through fractional share trading.

Why are people investing in penny stock?

The number one reason why people are investing in penny stock is that it is a way to get rich quickly. No matter how much you invest, i.e. even if you invest a few hundred dollars, it can turn into millions before you even know it. You can use that money anywhere to buy a yacht or to finance your kid's education.

However, the likelihood of getting rich from a penny stock is less. But those who have good knowledge on how to invest and perform due diligence tend to earn well from penny stock.

Apart from this, internet also has an excellent role to play in it. A few mentions of penny stock in Reddit forums can boost up the investment. TransEnterix Inc has almost doubled the average on Monday. This increment means that its trading volume has increased to more than 13 times its average. Zomedica has also mentioned it frequently on Reddit.

What are the benefits of penny stock?

Following are the benefits of penny stocks:

• Low share prices: One of the best features that penny stock offers is low cost shares. Thus, you don't have to invest a lot. This feature helps many investors to stay in their budget.
• High returns: Penny stock offers high returns on their stock. The companies that are involved in penny stock are usually in their growth stage and is very potential. Thus, the stock's value can rise high quickly than the other high-priced stock in a well-established company. Also, even if there is a slight increase in stock, the resulted profit is huge.

What are the risks relating to Penny stock?

You can divide the risk relating to penny stock in two categories:

• High risk: As much as it is easy to gain money from penny stock similar is the rate to lose it. If you see a low price of the stock, it is an indication that it is at high risk. The profit may increase in penny stock but so are the risks. So, it is advisable if you are an experienced investor then only to invest in penny stock. However, if you are willing to take a risk, you can go ahead.
• Liquidity: Liquidity in penny stock is a significant concern even though it has a small denomination than others. Moreover, since it's high in risk and has very less regulation, buyers doubt investing in it. Thus, affecting the liquidity of the stocks and making them risky for investors.

Things to keep in mind

Before investing in a penny stock, remember to keep in mind the following things:

Run detailed research

Penny stock companies are usually small and not so popular. They are not well known even though they have a proper listing in the stock exchange. But before investing here look properly into the company and understand what you are investing in for future. You don't want to end up bankrupt or with weak fundamentals. Check the fine print carefully before investing hard-earned money.

Do not invest in all.

Though it might see tempting to invest all of your money in stokes because of its low price but don't get lured away. This stock flows in large fluctuation. It is wise to invest in only 2 or 3 stocks only as you can keep a clear track of it.

Invest for short term

It would help if you planned to invest in a penny stock for a short-term only. It is essential because there is no predictability. So, there might be a situation in which you gain money, but you incur a huge loss the next day. So it is appropriate to invest for short term only. However, one should be clear that there is no easy way to make money.

Don't follow the crowd.

There are many rumors about penny stock. Some are true, and some are false. So, it's better not to follow the crowd and make your strategy. Many companies spread rumors purposely to show a high demand for the stock, so many traders show interest. And as there is not much information about penny stock, they invest their money when they see rising demand. Moreover, when the stock reaches a reasonable price, they immediately sell it off.

If you want to get in

This article is clear about how risky penny stock is even though if you want to invest in it, you can buy it in a traditional trading platform. Moreover, before investing, every investor should do their homework on doing comprehensive research about the stock. Remember to ask yourself why suddenly it has become a hot company?

There might be a lot of information indicating that it is a very profitable share but stay clear of it and make your own decision. It is your hard money that you are investing in.