These 3 popular myths about penny stocks are nonsense. Why is that?

There are many different myths and superstitions surrounding penny stocks. So let's take a look at the 3 most popular myths related to penny stocks. Not everything has to be completely true.

Cent stocks, also known as penny stocks with a low market price usually under $5, are surrounded by self-help mythology. Some investors avoid them like the devil, while others see them as a quick profit opportunity. The reality is much more complicated. Today we will attempt to debunk, and also clarify, three major myths about penny stocks and outline how these stocks can present interesting opportunities for investors.

Myth 1: Penny stocks are inherently risky

Risk is an inherent part of investing, whether it's in large corporate stocks or penny stocks. Of course, the risk is slightly higher for smaller and less stable companies, which are often paired with penny stocks, but that doesn't mean these stocks are automatically high-risk. The truth is that risk can be effectively managed with a well-thought-out investment strategy and a disciplined approach. Thorough company evaluation and analysis, as well as careful market monitoring, can help minimize the risks associated with these investments.

Indeed, many investors think of penny stocks that are not of good quality. For example, they show no earnings, or they don't even have a product yet. Yes I admit that there will be quite a few of these companies among penny stocks, but let's not lump them all together.

The penny stock label is not a label for the quality of the company, it is just a price label. It is therefore not at all impossible that you will find very high quality shares at very reasonable prices. For example, you may find a share that is of the same quality as, say, $KO, but at a very reasonable price.

If we look at the chart, even $KO was a penny stock until 1990. But why might there be a lot of undervalued stocks? The answer is simple, these stocks tend to have such small market capitalizations that it doesn't really pay for analysts to waste time on this sector. After all, to satisfy their capital allocation needs in this company, they would many times have to buy the entire company.

Myth 2: Cent stocks are good for beginners

It is often claimed that penny stocks are ideal for beginners because of their low entry costs. While it's true that low share prices can be attractive to beginners, successful penny stock trading requires a thorough understanding of market dynamics and financial analysis, which can be difficult for beginners.

But there is another problem, and that is mental toughness. This is because penny stocks are often very volatile, which may not do beginners in investing any good at all. I understand that high gains are good to take mentally, but again, large unrealized losses may not do so well on the psyche. For beginners, they can make them question their view of a company, which may not be ideal.

So personally, I would recommend beginners start with large and established companies, and then gradually work their way through smaller companies to these penny stocks.

Myth 3: Penny stocks have no growth potential

This is perhaps the biggest myth of all. The truth is that many successful companies started as penny stocks and grew into huge corporations. To give you an example, consider Microsoft $MSFT. This company was referred to as a penny stock until 1995 and has since delivered huge appreciation in the hundreds of thousands of percent.

The growth potential of these stocks lies in identifying these promising prospects. Deep analysis and understanding of the market can help identify these "hidden gems". Because of the low cost of these stocks, it is possible to buy a larger number of shares with a smaller investment, which can lead to significant percentage gains if these companies prosper.

Cent stocks are often associated with smaller, growing companies. These companies often have tremendous growth potential, which when combined with a low share price can create interesting investment opportunities. For example, a small technology company with an innovative product or service may see rapid growth and significantly increase the value of its stock.

Conclusion

Cent stocks are often viewed among investors as companies that are small, low quality, and there is a huge risk of failure. For some companies, of course, it will turn out that way. On the other hand, there are some interesting pieces to be found here that could provide investors with interesting gains in the future. After all, we saw this with the aforementioned Microsoft.

Remember, what is not written about is not necessarily garbage. On the contrary, there may be plenty of overlooked gems that investors just don't want to pursue. So if you have a higher tolerance for risk, and of course, a higher mental toughness, then by all means dabble in this area.

WARNING: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.