Who Benefits from Penny Stocks? 

 February 4, 2022

Should you even trade penny stocks? Are they worth anything, and who benefits from them anyway? Today, we will show you a primer to penny stocks to give you a deeper understanding of who benefits from this and whether or not you should invest.

What are penny stocks?

Penny stocks are not worth a penny only. These are stocks that are less than $5 per share. Most of these are small companies that went public. They are also called by many names like ”over-the-counter-stocks” or OTC. They do not trade in the typical stock exchange.

Will penny stocks make a return on investment?

Yes, it is possible. An excellent example of this is Booking (BKNG), which used to be Priceline.Com. It used to trade in NASDAQ for $1.08 per share back in 2001. As of 2022, the price is $2,461.42 per share.

Now, be careful with this. Penny stocks are still stocks, which means they are valued according to their worth as a business. Like all stocks, some companies may not be profitable, and some may even go bankrupt. It’s like gambling at a real money online casino Canada site, you either win or lose your stake.

Who benefits from penny stocks?

At first, it is the company that sold its shares that benefits. They sell shares to the public to amass money, which they would use either to pay debts or expand their businesses.

In the long run, it is the investors who benefit from it. For BKNG, just imagine a person who bought 1,000 shares 20 years ago. He would have spent $1,080 for all these shares. Now, his shares are worth $2,461,420.


What are the advantages of penny stocks?

Penny stocks are highly volatile. Why? Because they are cheap, the prices are easy to manipulate. As far as value is concerned, a person may be willing to add another 10% to its current price at any given time—something you would not see in a normal stock.

Why is this an advantage? It is an advantage because penny stocks that are volatile can yield big rewards. Since the stocks are cheap, they can offer high growth in a short period, which does not normally happen in ordinary stocks.

Another advantage is the massive profit for a small investment. In the example earlier, BKNG was trading at $1.08. After 20 years, the price has grown by more than 2,000%. Just imagine a 20-year-old individual who spent money on it. By the time he is 40, he has more than $2 million as a reward.

What are the disadvantages of penny stocks?

Yes, there are many disadvantages to penny stocks. Although the rewards are possibly exponential, there are many risks. For one, it is often subject to pump-and-dump schemes. A pump-and-dump is a process where influencers convince people to buy the stock. They create artificial demand. As such, the price would go up. Of course, the schemers already bought a lot of shares prior to “marketing” the stock. By the time the price starts to fall, they sell all their shares, making the price plummet even more.

There is also a thing that the industry called short-and-distort. It is the opposite of the pump-and-dump scheme. Here, they borrow massive amounts of the stock, believing that the price will decrease. After getting the stock, they sell it at the current price. Once the stock falls in price, they buy the same amount of stocks and give them back to who they owed them to.

How do they do this? They spread rumours against the company. Because of these rumours, the legitimate shareholders begin to panic and start selling for fear of losing whatever small profit they already had.

Should you invest in penny stocks?

Yes, you should, but only after doing your assignment. The way to go about penny stocks is the same as normal stocks. Study the company and its financials and then come up with a valuation. Understand how the company is planning to expand its business, and most importantly, you must know if the company is profitable or not.

There are many warning signs about penny stocks. For one, if there is little information about a company, walk away. There are also trading platforms that mark some stocks with skulls and crossbones. It means that the company for that stock is under investigation for fraud.

Treat penny stocks like normal stocks. Know the company, its future and its profitability. Despite the low price, money is still money—the last thing you want is to lose it.

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