Your Risk Tolerance and Penny Stock Investing

Now before we get any further into penny stock investing, it is wise for you to take into consideration at least some what you level of risk tolerance.  If you are new to investing, this is an important task to learn simply because you need to understand just what you are up against in this penny stock game.

What’s Risk?

Most people understand that a risk is something that is associated with the amount of safety that something has.  That is, if something is risky, you have a good chance of failing at it.  Now, that is not to say that all investing is risky.  All investing does have some risk to it, though.

Some stocks are safer than others because there is less likely to be that opportunity for them to implode.  Of course, it would be wonderful if we could all invest in safer stocks and count on the money coming in each and every month.  Yet, the safer a stock is, the less likely it is to have that huge windfall or to gain significantly.

That’s because of the company’s strategies.  What makes a stock safer is the fact that is it less volatile.  There is not enough opportunity for that stock to lose huge amounts of ground.  With less ability to do that, it is also less likely to gain substantial ground either. 

Therefore, it is less likely to move up or down drastically when you are investing in it.  The bottom line is that the safer a stock is, the less likely it is to offer you any risk but the less likely it is to offer huge gains at the same time.

On the flip side, there is no doubt that a risky stock is just that, risky.  By saying that it is risky, that means that it is more likely that the stock could lose ground.  That is often because the company may not be as stable but has good potential.  It may be that the way that the funds for that company are used is more potentially devastating. 

Yet, even with this risk again comes the fact that with more risk there is more opportunity to gain as well.  Because there is such a risk, there is also such an opportunity for substantial growth in the stock. 

Therefore, those that are investing in these stocks do need to keep in mind that there is a good deal of a chance that they could lose whatever they put into them.  On the flip side, though, the risk could pay off with a substantial amount of benefit in the long run as well.

The Penny Stock Risk Factor

Before we talk about where you stand on the scale of risk, we need you to realize that most if not all penny stocks are in fact risky business.  You have less of an opportunity to stay safe with these types of stocks.  Likewise, you have more of an ability to gain hugely than you would with a safer stock.  In many ways, it is an all or nothing type of situation.  The risk is there and is very real yet the benefits that could happen could be very big at the same time.

No one doubts that any stock is risky in that you are taking your cash and funds and putting them on the line.  There have been very good stocks that have gone very bad very fast.  Yet, there have been very risky stocks that have gone hugely successful at the same time.  Therefore, we now need to talk about you.

Your Risk Tolerance

As we mentioned, it is all up to you, now to determine what your risk tolerance is.  That means that you need to truly understand how much risk you can handle.  This will help you to understand if in fact the penny stock is the right type of stock for you, specifically. 

So, what’s your risk tolerance?  To determine this, you need to take into consideration how important the money that you are investing in means to you. 

• If you lose this investment, will you be okay as far as financially speaking?

• If you lose this investment, is there a method for you to re-coop your money?

• You should understand that investing in penny stocks means that you should be able to right off your funds and not have to worry about them.  Sure, no one wants to lose their money, but if you can safely say that it would be okay for your livelihood to lose it, then it is okay to invest in it.  Your risk level is much higher.

Those that have a risk tolerance that is higher are those that can benefit the most from penny stocks.  Those that have a lower risk level should tread lightly in the way of penny stocks.  Simply, you need to know that it is okay with you to tap in and lose that money.

Even though you will do your best to insure that this does not happen, you still need to insure that you can do okay if it should happen to you.

Not the Same Risk?

If you know anything about the standard stock market, then you know that the amount of risk that something carries is something that is defined by several things.  In fact, each stock can be seen from a different risk vantage point from one lender to the next.  Which type of investor are you?  In any case, what you need to consider is the fact that no two stocks are the same.

With that said, you can assume that there are some penny stocks that are less risky than others.  You can also assume that there are things including steps that you can take to insure that the penny stocks that you are investing in are the safest types of penny stocks available.  In short, you need to insure that what you invest in has the risk tolerance that you need.

The good news is that penny stocks do offer some flexibility in what risk that they provide.  You will learn in the next chapters more about how to learn more about the stock so that you personally can judge the amount of risk that plays a role in that stock. 

So, to sum up, here is what you need to do to determine just what your level of risk tolerance is.

1. Determine the amount of funds you plan to invest in penny stocks or other stocks for that matter.

2. Determine just how important it is to your financial security to have those funds.

3. Determine the amount of risk that you are personally okay with having in stocks.

4. Work with your financial planner or advisor to determine if the amount of risk is a wise decision for your own financial goals in the long term and short term.

5. Determine what risk level you are comfortable with and the type of penny stocks that fits those needs.

When you take the time to really work out what you financial risk tolerance is, you will be better suited to selecting the right type of stocks, penny stocks or otherwise, for you to invest in.  There is no wrong answer.  Remember, everyone’s life and their financial abilities are different than the next.  Going broke will not help you financially. 

The fact is that having the right combination of safety and risk is the biggest factor in investing in penny stocks.  You have to determine what that combination is for you personally.