So, how volatile is penny stock? As it represents developing companies with limited resources and cash, it is suitable for investors with high risk tolerance. This is to say that penny stocks have higher volatility levels. As a result, when investors expect a higher reward, they must face a higher level of inherent risk. Investors are open to losing their entire investment on a penny stock. They could lose more if they buy on margin. Buy on margin means the investor borrows funds from brokers or banks to buy the shares.
Therefore, the best suggestion is investors should consider the heightened risks related to penny stocks. The example would be, investors have to own a stop-loss order before entering a trade. Or investors should at least know what price level to exit the market when it turns against them. Stop-loss strategy helps investors to set price limits. When it reaches the price limit it will trigger an automatic sale of the securities.
It is indeed true that investors could have massive gain from penny stocks. However, it is vital to have realistic expectations. In addition, it is to note that penny stocks are low in trading volumes with high risk attached to it. There are indeed some advantages and disadvantages of penny stocks, investors need to know.
Compared to other established equities, penny stocks are more volatile. This is because penny stocks have low trading volumes. When stocks have low trading volumes, they are open to both huge gains and losses. Thus, investors should take a note to understand both risks and benefits.