As the market continues to fall, stock prices have hit new lows over the past few months. While this can make many investors nervous, it also means it’s a fantastic opportunity to buy at a discount.
Market dips are one of the most affordable times to invest because you can load up on quality stocks for a fraction of the cost. However, choosing the right investments is more important than ever because not all stocks will recover from this selloff.
While the investments you choose will largely depend on your personal preferences, there is one investment you’re best off avoiding: penny stocks.
Penny Stocks: Risks to Consider
Penny stocks are generally defined as any stock priced below $5 per share, with many costing $1 or less per share. Because of these low prices, they can be especially tempting when investing on a tight budget.
Although price is an important factor to consider when choosing stocks, there are several risks associated with buying penny stocks:
- Volatility: Penny stocks can be extremely volatile, experiencing huge 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 Search: Before you can sell shares of stock, there must be another investor willing to buy. Because penny stocks don’t have as many buyers, they can sometimes be difficult to sell. If you can’t sell your shares and prices plummet, you could potentially lose a lot of money.
- Lack of information: Penny stocks are usually 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 it difficult to research these stocks before you buy.
All of these factors combined mean that penny stocks can be incredibly risky. Although there is a chance to make a lot of money with this type of investment, you can easily lose a lot of money as well.
A safer (and equally affordable) option
The main advantage of penny stocks is their price, but there is another type of investment that is just as affordable: fractional stocks.
When you invest in fractional shares, you buy a small part of one share of a company’s stock. So if you want to buy shares of, say, Tesla but you can’t afford to spend more than $700 for a full share, you can buy a tenth of a share for just $70.
The best part about fractional shares is that you choose the price. If you can only afford to spend $5, you can buy a very small fraction of a share for $5. It also makes it easy to build a diversified portfolio because you can buy dozens of different stocks for under $100.
Fractional stocks can also take some of the nerve out of investing — especially when the market is volatile. If you want to invest but are nervous about throwing hundreds of dollars into the market during a downturn, fractional stocks can help you get into it more slowly.
The biggest risk to consider
One thing to remember when buying fractional shares is that it’s still crucial to do your homework when picking stocks.
It can be tempting to buy stocks in volatile companies simply because they’re affordable, but bad investments are still bad investments. No matter how much you spend, make sure you only buy stocks from healthy companies with long-term growth potential.
Finally, try to keep a long-term perspective. Many stocks will take a hit when the market is down, but the strongest companies will perform well over time. With fractional shares, it’s much easier to invest in these businesses without breaking the bank.
Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Tesla. The Motley Fool has a disclosure policy.