Penny Stocks!
Penny Stocks!
By Fiscal Focus | May 15th 2025
At some point, nearly every new investor has stumbled across an ad about stock trading for under $1. The logic is tempting: if this stock goes from 50 cents to $5, you’ve just made a 10x profit. That’s the appeal of penny stocks: cheap and full of promises. But as with most things that sound too good to be true, penny stocks often come with serious risks.
What Are Penny Stocks?
By definition, a penny stock is a stock that trades for less than $5 per share, according to the SEC. These stocks typically belong to small, unproven companies, and most don’t even trade on major exchanges like the NYSE or NASDAQ. Instead, they’re found on over-the-counter (OTC) markets or the OTC Bulletin Board, places with looser listing requirements and less oversight. Many of these penny stocks often include very small businesses, even those run out of a garage.
In other words, penny stocks are usually cheap for a reason. Their companies may be in debt, have no real business model, or, as mentioned before, brand new startups trying to find their footing.
Why People Are Drawn to Penny Stocks
The most obvious appeal is affordability. If you have $100, you can buy hundreds or thousands of shares of a penny stock—something you can’t do with companies like Apple or Amazon, which have much larger stock prices. And with that comes the dream: What if this little company explodes and I get rich?
That dream has fueled countless Reddit posts, TikToks, and online forums hyping up the penny stocks as the "next best thing". Some people see it as a modern gold rush, a quick way to make huge profits.
And every now and then, someone does get lucky. That’s part of what keeps the hype alive.
The Dark Side: Scams and Volatility
Unfortunately, most penny stocks are incredibly risky. Here’s why:
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Lack of information: These companies often don’t have to file regular financial reports. That means investors have little insight into how the business they invested in is doing.
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Low liquidity: It is often hard to find buyers and sellers, so prices can jump or crash with just a small number of trades.
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Pump and dump schemes: This is the classic scam where someone hypes up a penny stock, drives up the price, then sells their shares at the top, leaving others with the loss. This is exactly what happened at Jordan Belfort’s brokerage, Stratton Oakmont.
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Emotional investing: The hype around penny stocks often leads to impulsive decisions, FOMO, and overconfidence, not just among newer traders but even older, more experienced ones.
The result? Many investors end up holding worthless shares of a company that never had a future in the first place.
What to Know Before You Buy
If you intend to dabble in penny stocks, do it with these in mind:
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Only invest money you’re fully prepared to lose.
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Do your research, even if the company is obscure; find out everything you can.
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Don’t fall for hype. If someone is loudly promoting a stock online, ask yourself why and do your research.
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Use a reputable trading platform with access to real-time data and proper risk controls.
More importantly, consider whether there are better places to put your money. Diversified index funds, ETFs, and even high-quality individual stocks have a far better long-term track record.
Final Thoughts
Penny stocks promise quick gains, but they often deliver quick and hard losses. While it’s true that some small companies eventually grow into something great, the odds are rarely in your favor, and the lack of transparency makes it a tough game to win.
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