- If a penny stock company makes it big, it can offer investors gains of several hundred to several thousand percent. Unfortunately, many penny stock investors have learned the hard way that stocks in this category are prone to fail more often than they succeed. If a company goes bankrupt and is forced to liquidate its assets, stockholders stand to lose everything. Thus, it is important to only invest a small percentage of your portfolio in this category of stocks, so that a loss will not ruin you.
- Stocks trading in the OTC markets can be especially unpredictable. The price can rise significantly without warning, only to plummet the following day. Trading these stocks can be very dangerous. The Motley Fool advises that after you have done your research, plan on holding your penny stock for a minimum of three years, giving the company time to establish itself and work through its problems.
- Penny stocks are sometimes referred to as micro caps because they are companies with a limited amount of market capital to work with. When a company does not have a lot of investment capital to work with, it is up to the management team to figure out how to grow without spending a lot of money. When evaluating penny stocks, research the management team and look for companies that have teams who have built other companies successfully.
- Walmart was not always the dominant retail firm on the landscape. At one point, it was a small company that had limited resources at its disposal. When trying to find the next Walmart or other company that started small and grew, do some research and find out what steps they took along the way, then look for companies that are taking similar action.