Takeaways
- Penny stocks are common shares in microcaps or delisted public companies.
- Penny stocks can generate high capital gains with a low initial investment.
- Investors can buy penny stocks on stock exchanges or over the counter (OTC).
- Penny stocks are hard to diligence, have high volatility, and low liquidity.
- Nasdaq and the NYSE monitor stock price performance to maintain high-caliber companies that can maintain SEC financial reporting requirements.
When investors think about high-risk, high-reward equity investing, penny stocks—also known as microcap stocks—often come to mind. These ultra-low-priced shares are popular among speculative retail investors, stock traders, and institutional investors who hope to turn a small investment into a large return.
What Is a Penny Stock?
A penny stock is typically defined as a stock that trades for less than $5 per share, according to the U.S. Securities and Exchange Commission (SEC). These stocks often belong to small, early-stage, or financially distressed companies with a market capitalization of less than $300 million.[1]
Most penny stocks are traded over-the-counter (OTC) through platforms such as OTC Markets rather than on major stock exchanges like the New York Stock Exchange (NYSE) or the Nasdaq.
In some cases, companies may be listed on major exchanges but still fall into the category of “penny stocks” due to low share prices and small market capitalizations. Investors like to gain exposure to these penny stocks because, generally speaking, they are high-beta stocks.
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How Penny Stocks Work
Penny stocks function like other types of equity investments in publicly traded companies. You can purchase common stock, preferred stock, or other types of ownership in the company. However, penny stock companies are usually small businesses with limited operating histories, minimal revenues, and uncertain growth prospects. As a result, their shares are:
- Inexpensive, often under $1
- Thinly traded, low volume
- Volatile and prone to sudden price swings
Because they are not subject to the exact financial reporting requirements of larger companies, penny stocks can be more challenging to research. Many companies lack audited financial statements or up-to-date disclosures, leaving investors with little to rely on beyond sparse financials, press releases, and discussions with company management.
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Examples of Penny Stocks
Penny stocks are found in a wide variety of industries, ranging from biotech startups and mining companies to alternative energy firms and technology ventures. Some popular examples include:
- Monster Beverage Corporation (MNST) – Monster traded for literal pennies before its successful line of energy drinks. As of 2025, the stock is trading at around $50 to $60 per share.[2]
- Ford Motor Company (F) – During the 2008 financial crisis, the Ford stock dropped under $2 per share, making it a penny stock. The company has since restructured, and its stock is currently hovering around $10 as of June 2025.[3]
- Advanced Micro Devices (AMD) – AMD, a computer tech company, was seriously struggling in the early 2010s, with the stock price trading below $2. Under new leadership, the company emerged with a focus on high-performance technology and is now trading at over $120 per share in June 2025.[4]
These stocks can experience significant percentage gains or losses in short time frames. The fluctuations can be driven by hype, rumors, or social media chatter more than actual business performance.
Read More: 7 Types of Asset Classes
Should You Trade Penny Stocks?
Penny stocks may be tempting, especially for new investors drawn to the idea of making a quick buck by finding an investment that produces tremendously outsized capital gains. However, these stocks are not typically recommended for most long-term investors due to their unpredictability and high risk.
You might consider trading penny stocks if:
- You have experience managing high-volatility trades.
- You are comfortable with the possibility of losing your entire investment.
- You are using it as a small portion of a well-diversified investment portfolio.
Why Are Penny Stocks Risky?
Penny stocks come with significantly higher risk compared to blue-chip or mid-cap stocks. Here are the four main reasons why:
1. Hard to Research - Unlike companies listed on major exchanges, many penny stock companies do not file regular reports with the SEC. They are also not covered by sophisticated equity analysts that many institutional investors use to gauge investments. Limited transparency makes it hard to evaluate a company’s financial health or prospects.
2. Volatile - Due to low trading volume and low share prices, penny stocks are prone to sharp price fluctuations. A small influx of buyers causes dramatic spikes in stock prices, while a small cohort of sellers can put massive downward pressure on the stock.
3. Hard to Sell - Penny stocks often have very low liquidity, making them difficult to sell. You might struggle to find a buyer when you want to sell your shares or be forced to sell at a steep discount to exit your position.
4. Potential Scams - The penny stock world is notoriously susceptible to scams, especially “pump and dump” schemes. In these cases, fraudsters artificially inflate a stock’s price through misleading promotions and then sell their shares for a profit, leaving other investors with massive losses.
Read More: 11 Stock Market Segments
Alternatives to Penny Stocks
Investing is all about finding the right asset allocation that aligns with your investment risk profile. If you want affordable ways to invest without the extreme risk of penny stocks, you can consider these alternatives:
- Blue-Chip Stocks – Well-known companies offering more stability and transparency, some of which periodically trade below $20 per share. (Get started by Investing in Your First Stock).
- Exchange-Traded Funds (ETFs) – A low-cost, diversified way to gain exposure to various sectors, even with small investments. (Read about How to Invest in ETFs).
- Mutual Funds – These actively or passively managed funds pool together investor capital to invest across specific stock segments. (Learn more about How a Mutual Fund Works).
- Dividend Stocks – These offer potential dividend income and long-term capital appreciation from companies with established business models and financials. (Read about 7 High Dividend Yielding Stocks)
- Fractional Shares – Many brokerages now allow you to buy a fraction of a share of larger companies, allowing you to invest in household names for as little as $1. (Get fractional ownership with brokerage accounts. Check out our Acorns Review).
- Cryptocurrencies – Established cryptocurrencies, like Bitcoin, can make great alternative investments for the right portfolio. Investing in crypto can give you exposure to a growing technology, like blockchain. (Read the 7 Steps to Invest in Bitcoin).
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These options still offer massive upside but with far less risk than investing in speculative penny stocks. Consult with a financial advisor or financial planner to determine the portion of your investment capital that should be allocated to high-risk investments.
>> Don’t like risk? Read the Best 9 Low-Risk Investments for 2025
Smart Summary
Penny stocks are low-priced shares of small or struggling companies that can offer the possibility of huge gains but also carry outsized risks. Their lack of transparency, extreme volatility, and vulnerability to scams make them high-risk investments, especially for beginner investors. You can invest in penny stocks directly or gain exposure to high-risk, high-return investments through other asset classes, such as cryptocurrencies.
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(1) U.S. Securities and Exchange Commission. Microcap Stock: A Guide for Investors. Last Accessed June 24, 2025.
(2) Nasdaq. Monster Beverage Corporation (MNST). Last Accessed June 24, 2025.
(3) Nasdaq. Ford Motor Company Common Stock (F). Last Accessed June 24, 2025.
(4) Nasdaq. Advanced Micro Devices, Inc. Common Stock (AMD). Last Accessed June 24, 2025.
