The disadvantages of purchasing penny stocks

Most penny stocks are traded through online brokers. Like other investments, penny stocks have pros and cons. Most penny-stock companies are small fry with big dreams, living in the backwaters of the investment world. But if they are discovered by the investing mainstream, the stock price could explode upward in a matter of weeks or even days.

The disadvantages of purchasing penny stocks

What are the advantages and disadvantages of buying stocks instead of bonds? Lioudis Updated May 9, — 5: Stocks and bonds differ dramatically in their structures, payouts, returns and risks.

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In order to answer the question of the advantages and disadvantages of owning one over another, we need to go through a brief description of both stocks and bonds. A bond is a form of debt with which you are the lender instead of the borrower.

Bonds are contractual loans made between investors and institutions that, in return for financing, will pay a premium for borrowing, known as a coupon.

Additionally, the bond's face value is returned to the investor at maturity. The guarantee of payback and all coupon payments relies solely on the ability of the borrower to generate enough cash flow to repay bondholders.

Stocks are a form of ownership; they represent participation in a company's growth. Generally, investors are given no promises about returns of the initial investment.

In fact, the profitability of the investment depends almost entirely upon rising stock price, which, at the most fundamental level, relates directly to the performance and growth increasing profits of the company.

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So this leads to the original question: The answer is neither. Stocks and bonds both have their pros and cons depending on what you are looking for. For example, risk-averse investors looking for safety of capital and who prefer a known periodic payment structure i.

The disadvantages of purchasing penny stocks

On the other hand, investors who are willing to take on greater risks than bondholders and who would prefer the benefit of having partial ownership in a company and the unlimited potential of a rising stock price would be better off investing in stocks.

However, the disadvantage of stocks versus bonds is that stocks are not guaranteed to return anything to the investor, while in principalbonds offer fairly reliable returns through coupon payments. Thus, the possibility for high returns is greater with stocks, but so is the possibility of losing money.

For most investors, a combination of stocks and bonds is the best situation. By diversifying your investments and placing money into both stocks and bonds, you ensure some safety while leaving some opportunity for above- average returns in your stock investments.The main disadvantage of buying penny stocks is that the value of the stocks fluctuate enormously on a day to day basis.

Penny stocks may also be very hard to sell once you own them. The main advantage to buying penny stocks is that they are so cheap.

The disadvantages of purchasing penny stocks

One also has to consider the downside. The major disadvantage to penny stocks is that these stocks often fail. Without further ado, here are three penny stocks the pros are buying right now Arbor Realty Trust (NYSE: ABR) Arbor Realty Trust is a real estate investment trust with a market cap of $ million and a share price of around $ Even worse, buying too few stocks runs the risk of big losses.

With penny stocks, I know for certain 25% of the positions will be poor performers or losers. Stocks and bonds differ dramatically in their structures, payouts, returns and risks. In order to answer the question of the advantages and disadvantages of owning one over another, we need to go.

Subsequently, companies that offer penny stocks are not required to provide investors with basic financial information that would be useful in making decisions about the status of the company and the stock.

This is a disadvantage, considering the amount of risk that penny stocks already have.

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