Penny stocks are a form of investment that often carries significant risk. This type of stock refers to securities issued by companies whose market capitalisation is below SGD300 million and whose share prices range from fractions of a cent to several dollars. Penny stocks have become popular among traders in Singapore due to their low costs, liquidity, and potential for high returns. However, while they may offer substantial rewards, these investments also come with certain risks and drawbacks that investors should consider before investing. This article will explore the benefits and drawbacks of penny stocks in Singapore.
Benefits
Investors should know about several benefits of investing in penny stocks; these will help determine if this type suits them. In addition, knowing the advantages of investing in penny stocks can help traders make informed decisions.
Low cost
One of the main attractions to penny stock trading is their low cost compared to larger companies. For individuals on a tight budget, these stocks provide an opportunity to invest and still have enough capital left over for other investments or expenses.
High liquidity
Penny stocks have high liquidity, allowing investors to quickly enter and exit positions without waiting long periods or paying large commissions or fees. It makes it easier for traders to take advantage of short-term opportunities.
Potential for high returns
Although there is no guarantee that penny stocks will perform well, their potential for high returns makes them attractive to investors. The low cost of entry and high liquidity also make it easier for traders to capitalise on opportunities should they arise.
Accessibility
Penny stocks are relatively easy to access compared to more expensive stocks, making them a viable option for those who don’t have the capital required to invest in larger companies.
Low-risk speculation
Since penny stocks are often less volatile than more expensive securities, they offer an opportunity for low-risk speculation, which can yield significant rewards if successful. Moreover, due to their low cost, any losses are less substantial.
Diversification
Penny stocks offer investors the chance to diversify their portfolios in ways that may be more difficult with large companies because they are often less correlated to other investments and can provide a hedge against losses should the market decline.
Drawbacks
As with any financial product, there are certain risks associated with investing in penny stocks that investors must consider before deciding whether or not these investments are suitable for them.
Unregulated market
Penny stocks are subject to less regulation than other more expensive stocks, making them riskier for investors. It can lead to potential fraud as there is no oversight or accountability from a financial authority like the Singapore Exchange (SGX).
Low liquidity
Despite their high liquidity, penny stocks tend to be illiquid compared to larger companies due to the low number of shares traded and the fact that they are often not listed on major stock exchanges. Therefore, investors may have difficulty selling off their positions should they wish to do so.
Volatile prices
Due to the lack of regulation and liquidity in the penny stock market, it is common for these securities to experience sudden and drastic price fluctuations, which can result in significant losses for traders.
Lack of information
The lack of public information on penny stocks also challenges investors as it can be difficult to accurately assess the potential value of these securities. Therefore, traders must rely on their research and analysis when deciding whether to invest in penny stocks.
Thin trading volume
Penny stocks often have significantly lower trading volumes than larger companies, meaning there may not be enough buyers and sellers to create a fluid market, making it difficult for investors to execute trades at certain times.
Unexpected losses
Due to the unregulated and volatile nature of penny stocks, they can be prone to sudden losses, resulting in significant financial losses for investors. Traders must exercise caution when investing in these securities and be prepared for unexpected losses.
