If you are opening a brokerage account and learning to invest, you have to figure out a strategy for what to do with your money.
Sometimes, if you don't have a ton of cash to put into your brokerage account, it may feel as if your options are limited. After all, a lot of stock shares of companies you've actually heard of sometimes trade for a lot more than $100 per share -- so how are you supposed to afford that?
If you're worried about not having a lot of money to buy stock shares, you may be tempted to start trading penny stocks. That's the name given to companies that trade for under $5 a share. In reality, though, while these may seem like the most affordable option, you pretty much always want to steer clear of them.
The good news is, there are better solutions out there. Here's why you want to stay away from penny stocks, and what you should do instead.
Why you should steer clear of penny stocks
Although penny stocks can seem affordable because of their low price, the reality is that a low per-share cost does not make a stock a good deal. You want to focus on whether a company is worth its share price and whether it's likely to go up in value.
In other words, a stock priced at $200 a share that gives you an ownership stake in a solid company and that stands a good chance of providing a positive return is a much better deal than a stock priced at $1 a share with an unproven company at high risk of bankruptcy -- even though the $1 a share is "cheaper" on paper.
Penny stocks tend to be much riskier than other stocks. Not as many people trade them and they aren't as well-regulated so there are a lot more scams. Plus, they are often shares of unproven companies, where there's a very real risk of losing your entire investment.
In other words, they simply are not worth buying for most people who want to invest in the market to take a reasonable risk and build wealth.
What should you do instead?
Instead of investing in penny stocks, there's a much better option for investors who don't have a ton of money or who are looking for a stock with a low per-share price. That option is fractional shares.
Fractional shares are partial shares. They allow you to buy a portion of a share of a stock that trades at a higher price than you might be able to afford if you had to buy a full share. For example, say you were interested in buying shares of Amazon.com, which trade at around $170 a share as of early February. If you only had $50 to invest, you could buy 50/170th of a share or about 29% of a share.
Many of the best brokerage firms for fractional shares allow you to invest with as little as $1 and don't charge commission, so making small investments makes sense. And you get the same percentage gain as all other inventors. So if Amazon's price doubled, someone with a $170 share should make 100% or $170, while you'd make $50 on your $50 investment and double your share.
Most brokerage firms that offer fractional shares have screeners that help you find which ones to buy. For example, Fidelity offers a choice of more than 7,000 stocks and ETFs that you can buy fractional shares of. Rather than buying penny stocks, start researching your options today to take full advantage of this better solution.
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FAQs
Penny stocks come with high risks and the potential for above-average returns, and investing in them requires care and caution. Because of their inherent risks, few full-service brokerages even offer penny stocks to their clients.
What is the point of buying penny stocks? ›
Investors who like penny stocks perceive them as having several attractive features: the low stock price, which allows investors to buy a relatively large number of shares, and the potential for quick gains." Some penny stock investors may buy tens of thousands of shares for a relatively low amount of money, hoping ...
Is it wise to buy cheap stocks? ›
They are also known to be risky and volatile, which understandably makes some folks hesitant to buy them. Still, plenty of people love cheap stocks for their affordability factor and their ability to reap big gains in a short period of time (though, this also means investors can suffer big losses in a hurry).
Is investing $1 in stocks worth it? ›
Investing $1 a day not only allows you to start taking advantage of compound interest. It also helps you to get comfortable with investing and develop the habit of putting your money to work for you. As you can see, that single dollar can make a huge difference in helping you to become more financially secure.
Why do people avoid penny stocks? ›
Although there is nothing inherently wrong with low-priced stocks, they are considered speculative, high-risk investments because they experience higher volatility and lower liquidity. For example, if you buy a penny stock and then decide you want to sell it, it could be more difficult for you to find a buyer.
Do people get rich trading penny stocks? ›
Yes, you can make money with penny stocks, but you can also make money playing the lottery, though you probably won't. To make money in penny stocks, you have to be able to separate the good companies from the bad, and that means you have to be able to analyze companies.
Do penny stocks ever recover? ›
Penny stocks can provide significant returns, but they also come with a lot of risk, which may not be for everyone. Make sure you do proper research, understand the risks and only invest money you can afford to lose.
What are the hottest penny stocks right now? ›
30 Symbols
- NOK3.930.14% Nokia Oyj.
- LCID3.120.31% Lucid Group, Inc.
- NYCB3.890.18% New York Community Bancorp, Inc.
- PLUG3.440.55% Plug Power Inc.
- BB3.470.37% BlackBerry Limited.
- TLRY2.090.10% Tilray Brands, Inc.
- CHPT1.850.13% ChargePoint Holdings, Inc.
- SPWR4.391.64% SunPower Corporation.
Top 15 Most Successful Penny Stocks in History
- Nike (NKE)
- NVIDIA (NVDA) ...
- Monster Beverage Corporation (MNST) ...
- Tractor Supply Company (TSCO) All-Time Return: +54,978% ...
- Axon (AXON) All-Time Return: +48,911% ...
- ASML (ASML) All-Time Return: +30,001% ...
- Netflix (NFLX) All-Time Return: +27,719% ...
- Tesla (TSLA) All-Time Return: +11,641% ...
The best penny stocks under $1 in May 2024 are:
- Ginkgo Bioworks Holdings Inc. [NYSE: DNA]
- Chicken Soup for the Soul Entertainment Inc. [NASDAQ: CSSE]
- Inno Holdings Inc. [NASDAQ: INHD]
- Collective Audience Inc. [NASDAQ: CAUD]
- Biomerica Inc. [NASDAQ: BMRA]
10 Best Growth Stocks to Buy for 2024
| Stock | Implied upside from April 25 close* |
|---|
| Tesla Inc. (TSLA) | 23.4% |
| Mastercard Inc. (MA) | 19% |
| Salesforce Inc. (CRM) | 20.8% |
| Advanced Micro Devices Inc. (AMD) | 30.1% |
6 more rowsApr 26, 2024
Still, penny stocks have their risks — over 90% fail. But the stocks that do well can yield respectable returns for investors.
Is $100 too little to invest? ›
Investing just $100 a month can actually do a whole lot to help you grow rich over time. In fact, the table below shows how much your $100 monthly investment could turn into over time, assuming you earn a 10% average annual return.
How to become a millionaire in 30 years? ›
Assuming that you can earn this 10% average return over your investing career, if you are getting started investing this year and you want to become a millionaire in 30 years, you would need to invest $506.60 per month. This amount may seem like a lot, but it may actually be pretty doable for many people.
Is $100 dollars a good investment? ›
On average, the stock market yields between an 8% to 12% annual return. Investing $100 per month, with an average return rate of 10%, will yield $200,000 after 30 years. Due to compound interest, your investment will yield $535,000 after 40 years. These numbers can grow exponentially with an extra $100.
What percent of penny stocks fail? ›
Still, penny stocks have their risks — over 90% fail. But the stocks that do well can yield respectable returns for investors.
Can penny stocks recover? ›
In a best-case scenario, a penny stock has likely significantly underperformed the expectations of company management or it wouldn't be trading at such a low share price in the first place. These types of companies can always rebound, but an underperforming company isn't an ideal investment.
What did Jordan Belfort do with penny stocks? ›
Belfort founded Stratton Oakmont as a franchise of Stratton Securities, then later bought out the original founder. Stratton Oakmont functioned as a boiler room that marketed penny stocks and defrauded investors with "pump and dump" stock sales.
How can penny stocks be risky if they are so cheap? ›
A Risky Proposition
They tend to be volatile, and they trade in low volumes, which means they're subject to price fluctuations from even relatively small trades. The low trading volume of these securities also can make them hard to sell due to a potential lack of buyers.
