As the market continues its slide, share prices have hit new lows in recent months. While that can be worrying for many investors, it also means it’s a fantastic opportunity to buy at a discount.
Market downturns are one of the most opportune times to invest, as you can buy quality stocks for a fraction of the price. However, choosing the right investments is more important than ever as not all stocks will recover from this sell-off.
Although the investments you choose will largely come down to personal preference, there is one investment that is best avoided: penny stocks.
Penny Stocks: Risks to Consider
Penny stocks are generally defined as stocks priced less than $5 per share, with many costing $1 or less per share. Because of these low prices, they can be especially tempting if you’re investing on a budget.
While price is an important factor to consider when choosing stocks, there are some risks involved in buying penny stocks:
- Volatility: Penny stocks can be extremely volatile and experience massive price swings from day to day. While all stocks can experience turbulence at times, penny stocks experience some of the most extreme ups and downs.
- Less demand: Before you can sell shares of a stock, there must be another investor willing to buy it. Because penny stocks don’t have that many buyers, they can sometimes be difficult to sell. If you can’t sell your shares and prices fall, you could potentially lose a lot of money.
- lack of information: Penny stocks are generally issued by smaller companies, and that in itself can be a risk. Also, smaller companies often don’t have as much publicly available information, which can make these stocks more difficult to research before buying.
All of these factors combine to mean that penny stocks can be incredibly risky. While there is a chance that you can make a lot of money from this type of investment, you could also easily lose a lot of money.
A safer (and equally affordable) option
The main benefit of penny stocks is their price, but there’s another type of investment that’s just as affordable: fractional stocks.
When you invest in fractional stocks, you’re buying a small chunk of a single stock in a company. So if you own stocks of, say, Tesla but can’t afford to spend more than $700 for a full share, you could buy a tenth of a share for just $70.
The best thing about fractional shares is that you choose the price tag. If you can afford to spend just $5, you can buy a very small piece of a stock for $5. It also makes it easier to build a diversified portfolio, since you can buy dozens of different stocks for under $100.
Fractions of stocks can also take some nerve out of investing — especially when the market is shaky. If you want to invest but are nervous about throwing hundreds of dollars into the market during a downturn, fractional shares can help you adjust to the market more slowly.
The biggest risk to consider
One thing to keep in mind when buying fractional shares of stocks is that it’s still important to do your stock-picking homework.
It can be tempting to buy stocks in shaky companies just because they’re affordable, but bad investments are still bad investments. No matter how much you spend, make sure you only buy stocks in healthy companies that have the potential for long-term growth.
Finally, try your best to keep a long-term perspective. Many stocks will take a hit when the market is in a slump, but the strongest companies will do well over time. With fractional shares, it’s much easier to invest in these companies without breaking the bank.
Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.