Last updated on July 30th, 2022 at 08:28 pm
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Before getting started investing in penny stocks many want to know how much shares generally go for. They ask questions like “do penny stock shares have a limit?” or “what’s the highest a penny stock can go?”
There is no limit to how high a penny stock could go. Some companies that started as penny stocks are now billion dollar companies.
But that didn’t happen overnight.
While technically penny stocks could climb massively and become giant companies, what happens with most penny stocks is that they stay cheap for years and years. While you might get lucky and find the next billion dollars business amongst all the failing companies you are far more likely to invest in one that goes nowhere.
In this article I’m going to shed some light on penny stock investing and help you understand the risks and potential rewards associated with these types of stocks.
While many people have found success with penny stocks in the past, They will also have taken massive losses. My goal here is to help you mitigate your risk as much as possible by providing more insight into penny stocks.
What is a Penny Stock?
The SEC defines penny stocks as shares of companies that are trading below $5.
The companies that are traded as penny stocks are typically small and lack liquidity or ready buyers in the marketplace. They may also be larger companies that have fallen on hard times or that are in a dying business.
Additionally, many penny stocks are not listed on a major stock exchange (such as the New York Stock Exchange or NASDAQ).
Because share prices for these stocks are generally low, they can be attractive to investors who want to buy more shares with less money in hopes of getting massive returns.
While that can happen in some cases it is quite rare.
How High Can A Penny Stock Go?
As I discussed at the beginning of this article, there is no ceiling when it comes to the share price of any stock.
With that said, in order for a stock to be considered a “penny stock” it needs to be trading below $5. Otherwise it is really just a regular stock.
So while many companies start out as penny stocks after a while they will no longer be considered one… even if when you bought them they were only a few pennies a share.
If you invest wisely in penny stocks (and get a bit lucky), the reward can be massive.
However, the market can be extremely volatile and the companies that are traded as penny stocks rarely ever become large enough for the reward to pay off like people hope.
Most penny stocks will stay obscure and rarely ever move out of the penny stock territory.
Are Penny Stocks Risky?
Penny stocks are considered high risk for a multitude of reasons.
Penny stocks are considered risky because:
- They are illiquid
- The companies are small
- The risk of bankruptcy is high
- Far more fail than succeed
Although it would be great if all you had to do was invest in a few penny stocks to be a millionaire, unfortunately that isn’t how it works. You could invest in hundreds or thousands of penny stocks and never get a single one that brings in a good return.
The risk factors mentioned above make it extremely unlikely that the companies will survive long term or that their stock price will skyrocket. However, it does happen which is why so many people still love the idea of penny stocks.
A good comparison to penny stocks is metal detecting on a beach. You have to spend money to buy the metal detector (have some money to buy the penny stocks) and will spend hours searching the beach with it (doing research on penny stocks).
When you get a hit with your metal detector (actually buy a penny stock you think will go up) often you will pull garbage out of the sand (the company will be trash). However, eventually you will likely find some loose change (those penny stocks that give you small returns on your investment).
The hope of all metal detectors is to find that big item, a diamond or gold ring (that penny stock that becomes a big company). It’s pretty rare in both cases but when it does happen it can make up for all the time spent metal detecting (researching the penny stocks).
Penny stocks can be suitable for investors without a lot of investment capital, who want to buy a large amount of shares for less money.
However, to make any money with penny stocks you really have to do a lot of research on the companies and spread your risk by diversifying.
Maybe you will get lucky and find that diamond in the rough!
How Is A Penny Stock Created?
Startups and other small companies usually issue stock as a way to raise capital and grow their businesses.
While this process can be time consuming, issuing stock can be one of the fastest and most effective ways for a startup to obtain the capital they need to grow.
A penny stock is just like any other publicly traded stock in that it is created through an IPO (or initial public offering).
In order for the penny stock to be listed on the OTCBB (which is where most penny stocks are traded) the company needs to:
- File a registration statement with the Securities Exchange Commission
- Check state securities laws in the locations the company plans to sell its stock
- Wait for approval to begin soliciting orders from investors
The company can either remain trading on the over-the-counter market or apply to have their stock listed on one of the larger stock exchanges as they grow larger.
Should I invest in Penny Stocks?
While many experts and analysts swear off penny stocks entirely due to the high risk involved, it can be used as a way to get into stock investing for beginners who don’t have much to spend.
If you do hours of research every week for months and years at a time you can get good at finding small companies to invest in. However, even with hours of research many penny stock companies will fail.
There is nothing wrong with putting some of your portfolio into penny stocks but the majority of your money should be invested elsewhere in most cases.
What’s the highest a penny stock can go? There’s technically no limit to how high the share price of a penny stock can go.
Remember, though, to be considered a penny stock it needs to fit a certain criteria.
For one, the stock needs to be trading below $5 and is typically from a small company or startup with little to no liquidity.
If you’re thinking of investing in penny stocks, it’s important to educate yourself as much as possible before you do to prevent taking any major losses or investing in a fraudulent company.