Most online brokers allow trading of penny stocks that trade on major exchanges, but some limit or restrict over-the-counter stock trading or charge extremely high fees. ![]() These types of companies can always rebound, but an underperforming company isn’t an ideal investment. 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. To make matters worse, limited regulatory oversight of penny stocks opens the door for con artists to orchestrate penny stock scams, frauds and pump-and-dump schemes.Įven penny stock companies that are not outright frauds may have little financial information available for investors to analyze or monitor, making it difficult to know exactly what’s going on with the company. The low liquidity of penny stocks can make them prone to extreme volatility and even market manipulation by nefarious actors. The SEC has explicitly warned investors of the risks associated with buying penny stocks, including the “possibility that they may lose their whole investment.” Most successful penny stock traders don’t think of the stocks as long-term investments and are more focused on timing short or medium-term entry and exit points to turn a profit.Ī long-term study of more than 10,000 over-the-counter (OTC) securities, most of which are penny stocks, found these stocks generate an average annual return of -27%. They are extremely volatile, making it easy for investors to lose a large amount of money in a short amount of time. In addition, many penny stocks have low trading liquidity. While there are always some hidden gems among penny stocks, most stocks trading under $5, particularly those trading under a dollar, are cheap for a good reason. Most penny stocks are not considered good long-term investments. But it can also be an emotionally and financially rewarding experience for successful penny stock investors. It can be difficult to hunt down a handful of high-quality stocks among the thousands of low-quality penny stocks in the market. Penny stock investors can reduce their overall risk by diversifying their portfolios rather than picking just one stock and going all-in. But top-performing penny stocks can generate tremendous long-term returns for speculators with high-risk tolerances. ![]() Investing in penny stocks is not for the faint of heart and comes with sizable financial risk. In addition to low share prices, the stocks on this list have underlying businesses that are profitable and/or growing and valuations that indicate significant potential share price upside from current levels. According to Daniel Milan, founder and managing partner at Cornerstone Financial Services, investors should focus on value and business fundamentals, not share prices. That said, the price of stocks should not be the sole determining factor for investors. We also didn’t consider stocks that exceeded $5 per share. At least one “buy” rating by a Wall Street analyst is a vote of confidence from a professional stock picker.įor penny stocks, we didn’t consider companies with market caps of less than $250 million because of their risky nature. A strong number of analyst “buy” ratings indicates an expectation the stock will outperform the overall market.
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