Penny Stocks

When we talk about “penny stocks” today, we usually mean company shares that are trading for less than 5 USD per share. An alternative term is micro-cap stocks, since the total capitalization tends to be very low when each share is worth so little. While the term “penny stocks” implies these stocks to be valued at one or a few pennies, that is rarely the case nowadays. The U.S. Securities and Exchange Commission (SEC) currently classifies any security traded under $5 as a penny stock.

Penny stock companies can have a low valuation because they are new and up-and-coming, or because they used to do better but are now struggling. They are usually not traded on exchanges like the New York Stock Exchange (NYSE) or Nasdaq, but are found on over-the-counter (OTC) market places.

The Attraction of Penny Stocks

The primary allure of penny stocks lies in their low price and potential for significant returns. Because of their low per-share price, small changes can result in substantial percentage gains. For instance, a shift from $2 to $4 equates to a 100% return on investment.

Some traders are also happy about being able to buy 100 shares or more for very little money. If you want to buy a 100 shares in Apple, which is definitely not a penny stock, it would today – when this article is being written – require an investment exceeding $17,200. For a 100 shares in Texas Pacific Land Corp, you would need to put well over $580,000 on the line. Penny stocks, on the other hand, is something we can invest in without having access to a big bankroll, and this is part of their appeal.

It is also important to remember that penny stocks are appealing to certain traders who really like the idea of finding “a diamond in the rough”. Buying blue chip stock might be a safe and suitable investment, but does it make you feel like you are a highly skilled investor who can read the market better than most other traders?

Last but not least, investing in penny stocks can be quite the adventure, and some treat it more like a casino experience than traditional investing.

The Risks Involved 

The bright sides of penny stocks should not be allowed to overshadow their inherent risk. The same volatility that can lead to massive gains can also result in significant losses. Some penny stocks have become penny stocks specifically because the company is in a downward spiral. A bankruptcy can wipe out your entire investment and this should be taken into account before you put any money at risk.

Investing in penny stocks comes with higher risk due to lack of liquidity, sometimes limited company information, and a high potential for fraud. Due to the low liquidity, investors might find it challenging to sell stock since there might not be enough buyers in the market. Sure, you could put in a stop-loss order in an attempt to manage the risk, but is there anyone on the other side willing to buy?

Limited company information makes it harder for investors to make informed decisions. If you are used to buying exchange-listed shares, remember that the OTC markets are less regulated than exchanges, both from a legal perspective and when it comes to the internal protocols of the market place.

Fraud is not just something that can happen because of fraudulent pracitises within the penny stock company – it can also be the result of outside fraudsters. An absolutely legal and reputable penny stock company can for instance be used by a scammer running a pump-and-dump scheme.

How to Invest in Penny Stocks

Despite the risks, if you choose to invest in penny stocks, doing thorough research and exercising caution is vital. 

1. Research: Begin with investigating the company whose stock you’re considering. Look at its financial status, market position, and industry potential. 

2. Diversify: Don’t put all your eggs in the penny stock basket. Diversify your portfolio to mitigate the risk associated with these stocks.

3. Use Limit Orders: A limit order allows you to specify the maximum price you’re willing to pay for a stock, offering a better control over the amount of money invested.

4.Be Prepared for Losses: Be mentally prepared for potential losses. Investing in penny stocks should be approached with money you are okay with losing.

5. Avoid Frauds: Research common scams involving penny stocks and be aware of the warning signals.


Penny stocks might seem like an attractive option for their potential high-yield returns. However, they are not for the faint-hearted due to their inherent volatility and risk. With the right strategy, thorough research, and a bit of luck, investing in penny stocks can be profitable. As always, invest wisely and cautiously.