Securities come in many shapes and sizes. In the financial industry, this is usually represented by share price and market capitalization. As an investor, there are many decisions you will have to make in order to be successful. At the base of these decisions are the questions what companies to invest in, what types of investment to choose, and what platform to use.
Of the different types of investments, penny stocks have become popular among many investors. This article will evaluate some of the advantages and disadvantages of penny stocks and focus on the platform Webull, a popular brokerage firm for investing in these securities.
Once the decision has been made to start investing, the next choice is what platform you will choose. Webull should be of serious consideration when it comes time to make this decision. Here’s why:
Webull boasts of no commissions or fees for most transactions. In addition, Webull does not charge any fees for trading stocks with a share price under $5.00. This covers most securities considered “penny stocks.” Additionally, there is no minimum deposit to open a cash account, creating low barriers to entry for most investors.
This is especially useful when dealing with penny stocks that have low values. Webull will not charge any annual fees, inactivity fees, or maintenance fees, making it very inexpensive to trade. Several platforms are not as generous and come with higher fees.
Webull does not, however, include all penny stocks on the market. The platform does not offer over-the-counter (OTC) securities and pink sheet stocks. This type of trading is riskier because there are fewer requirements for stocks to trade on these exchanges. To trade penny stocks in this fashion, consider platforms such as Firstrade or Moomoo.
Webull offers penny stocks that are listed on either the NYSE or NASDAQ. There are more requirements for securities to trade on these exchanges which removes some (but not all) of the risk involved in penny stocks. Trading in OTC transactions is particularly risky because of the low number of requirements to list a particular stock.
If you think trading penny stocks may be of interest to you, a great place to start is paper trading. This is a simulated trading environment with fake money where you can test your strategies without risking any real money.
Webull offers this feature while other discount brokers like Robinhood do not. Through Webull, you can access $1,000,000 in fake cash to experiment with before you’re ready to trade real dollars. Having this ability makes Webull stand out and can be a great starting point for many investors.
After completing some research and even experimenting with paper trading, you may be ready to get started in the official markets. When you are ready to buy penny stocks on Webull, the process is the same as making any other trade on the platform.
Once you have done your research on the stock, search for the company, select it, and trade! You are now the owner of a publicly traded company!
Through the platform, you are able to buy individual or fractional shares of a company. Each share represents legal ownership of a stock.
Fractional shares allow you to buy shares in terms of dollars and not whole shares. These fractional shares offer partial ownership in a company's stock. Fractional shares are a great way to enter the market at a price affordable to the average person.
This will not largely impact your decisions with penny stocks since the price of the stock is relatively low. However, knowledge of how you can use Webull to purchase penny stocks is still beneficial for a well-designed portfolio.
Purchasing fractional shares does not reduce your risk when investing. You will still be impacted by price fluctuations and market volatility. However, by purchasing fractional shares, your money can go further, allowing you to diversify across many different stocks and industries.
One of the most time-tested, widely accepted general rules of the stock market is that risk and reward go hand in hand. This means that risker investments can (but do not always) lead to higher rewards. Penny stocks are no different. Because these investments can be riskier than purchasing a company in the S&P 500 for example, it is even more important to have a plan and properly mitigate risk.
The first step is to evaluate your personal risk tolerance. There are a lot of great resources for assessing your financial risk tolerance if you are interested in a more in-depth analysis.
There are also ways to do this yourself if you feel you have a general understanding of your risk tolerance. Ask yourself questions such as will I lose sleep if I see large fluctuations in the value of a stock? What will happen to my personal financial situation if this investment goes to zero? If your answers to these questions bother you, penny stock trading might not be the best form of investing for you.
After you have determined penny stock trading is a fit for you, consider the individual stock and the sector you are interested in. Webull’s platform includes research from analysts that can help you make informed decisions. Before making any trades, read up on this information as well as doing your own research.
Most investors will have a general idea of the company and sector they are interested in, but while penny stock trading, this is even more important. Watch out for industries that have high fluctuations in stock price and industries with limited regulations or guidance. Factors like these can make your investment skyrocket or fail miserably.
Remember to stay educated on the company and the industry when purchasing penny stocks. Both immediately after purchase as well as the entire duration of your stock ownership.
Webull’s platform also offers different types of trades that can help mitigate risk. A popular, useful way to do this is by setting a stop loss on a particular position.
Stop losses are a type of market sell order that will automatically sell all of your shares at a predetermined price. This type of transaction can help you decide when to get out of the market.
It can also help in considering your entry point to the market. This will play a critical role in your results and success. In theory, everyone would love to enter the market low and exit high, but it can be hard to determine this. It is no different with penny stocks, but Webull provides some of the tools to stay on top of it.
Investors often focus on the price of a stock or the potential gains an investment may have. Behavioral finance researchers describe this as “loss aversion.” But it can be just as important to have a plan if the price of a stock goes down.
Webull’s tools can also help in making these decisions. Thinking about losses as well as gains makes a truly intelligent investor. Those who do well in trading think about both and sell when things go bad instead of holding the position in hopes that the price will increase.
If you manage risk while trading penny stocks, you will find that you grow not only more successful but also more confident.
A penny stock is a catchy name, but it does not actually mean that the stock will only cost a penny. In fact, a penny stock is typically defined as a stock that trades at or below $5 per share.
The low cost of these securities may be enticing to both first-time investors and experienced investors looking to make profits, but these stocks do not come without risks. If not managed correctly, they can be some of the riskiest investments out there.
Penny stocks are defined as micro-cap meaning their market capitalization usually falls between $50 million and $300 million. This may still seem like a lot of money, but for comparison, Apple is considered a large-cap company and has a current market capitalization of +$2 trillion.
A lower market capitalization can mean the price of the shares are lower. But it is important to remember a low price does not necessarily mean the stock is a “good deal.”
After understanding what a penny stock is, the next question is how do these investments actually work. Due to lower market capitalizations, penny stocks are less liquid.
This means that there are fewer buyers and sellers in the market for each company. Fewer investors interested in the same stock leads to less liquidity. This only increases the risk of holding these stocks.
Although it’s possible, penny stocks do not always work with a long-term buy-and-hold investment philosophy. There is often high trading and volatility with these securities and investors are often looking for short-term gains. However, some success stories exist with penny stocks and that is what makes these investments so exciting.
In 1986, Microsoft was once trading at $0.10 per share, well deserving of the penny stock title. Now over 30 years later, Microsoft is one of the most valuable companies in the world. If you’re familiar with basic investing, there are a lot of similarities between investing in well-known stocks compared to investing in penny stocks. However, research is key before a decision should be made.
To summarize, deciding if penny stocks are an appropriate investment for you does not have a simple yes or no answer. Yes, many risks come with penny stocks, but if done correctly, there is plenty of money to be made in this market.
Research and understanding your risk tolerance are key to successful investing. As you take emotions out of investing and focus on the data that Webull can provide, you will find more success is ahead of you.
Using Webull will help you utilize strong research and mitigate risk to make smarter decisions in this volatile industry. Happy investing!