Can you make money with penny shares?

Many people avoid Penny Shares after hearing horror stories about how scams, stock dilution or other factors have left people flat broke. The truth is that the Penny Shares market can be a lucrative and rewarding investment area if you know what you’re doing. It may not be the best idea to have an entire stock portfolio of Penny Shares but 5-10% can return a nice profit alongside your more stable investments.

How do Penny Shares Work?

A Penny Share is basically a low-cap stock that you can buy for less than £3. The companies involved ideally have an annual turnover of a few million but generally present a risk to the investor due to the volatile nature of small-to-medium business stocks. The most successful results are often gained through investing in a company that operates in an emerging market that you know something about and one that offers great potential for earnings.

In order to buy and sell Penny Shares, most people hire a broker who operates in the over-the-counter (OTC) market and who can trade for them. This means that on top of the actual price of bought shares or the money from the sale of shares, you will need to pay a broker’s commission which will offset against your profits. This means that you need to be confident about the return on your investment in order to make that elusive fortune from Penny Shares.

Are Penny Shares Worth the Risk?

Penny Shares are almost certainly not for everyone. Some people prefer to only invest in mid- to high-cap stocks and like to build up their portfolio gradually, weighing up each investment carefully. Penny Shares on the other hand are often referred to as “the slot machines of the stock market” due to their nature being somewhat similar to that of the casino games. The risks involved may be high, but the return on your investment can be relatively large compared to other stocks and in some cases can be huge.

In order to protect yourself from scams and other dangers involved in trading Penny Shares such as stock dilution, you should make an effort to gain knowledge of the stock market in general first. Learn about cash flow, how to read balance sheets, and about market capitalisation and share structure. Learn about the many warning signs to look out for when trading Penny Shares and how to avoid the unsavoury con artists who manipulate the market to earn themselves a tidy sum.

As mentioned above, most people advise to keep tiny shares limited to around 5% of your stock portfolio, but many people do get by just fine trading Penny Shares alone. It all depends on how much risk you are willing to take and how well you get to know the market. You should definitely at least make a small investment in Penny Shares to see how you get on. You never know, you could discover the next big thing and net yourself a fortune in profits.