What are penny stocks and should you trade them?

What are penny stocks and should you trade them?

Are you thinking about getting started in stock trading, but your budget is limited? What if we told you that there is a way to make some money from stock investments even with just a couple of bucks?

Penny stocks are just like any other stocks, but there is one very important difference - the price. There are many penny stocks that you can trade, and most of them cost less than $5

While penny stocks are heavily favored by beginner traders who simply do not have huge budgets to start with, there are some serious risks associated with trading these stocks. Simply put, penny stocks are not for everyone. 

"Sorry. You won’t get rich quickly in this niche." - Timothy Sykes

While some might find them very helpful and profitable, others believe that trading penny stocks is simply too risky. In today’s guide to penny stocks, we are going to discover all the important details you should know about penny stocks. So, without further ado, let’s get into it and see if you should trade penny stocks or not. 

5 Things to Know About Penny Stocks

  • Penny stocks usually cost less than 5 US dollars
  • These stocks are usually traded by newcomers
  • There are many reasons why the price of a stock might be so low, and understanding the reasons can help you decide whether to invest in the stock or not
  • While penny stocks can be a great investment option, there also are many risks associated with them
  • Penny stocks are rarely traded on major stock exchanges

Penny Stocks - What Are They?

To define penny stocks is quite straightforward. As it states, penny stocks are those that cost less than $5 per share. These kinds of stocks have been around for a long time, and the views about them vary largely among different stock traders.

While some traders believe that there are numerous opportunities that come with these stocks, there are others who simply believe that penny stocks should be avoided as there is not much good associated with them. 

The thing is, while it is true that investing in penny stocks can be a great idea in some cases, there are other situations when it is better to avoid investing in these assets. There are different reasons why a trader would decide to invest in penny stocks. 

First of all, let's discuss a situation where you are a beginner trader, and it is one of your first investments. You might be thinking that the price of penny stocks is very low, and for getting started, they might seem a great option. 

Penny stocks allow traders with a very low initial investment to become part of the market. But, this is not the only reason why someone would buy penny stocks. 

Sometimes, these stocks become very popular among traders because they believe the price is going to increase at some point in the future. Because the initial price is so low, many investors believe that investing in them can provide huge profits in the future.

Penny stocks are great, yet risky investments that should sometimes be avoided by traders if they are not capable of opening up to so many risks. We will discuss the reasons why someone would avoid trading penny stocks below.

The Safety of Trading Penny Stocks

While there are some reasons why people choose to trade penny stocks, there are also other traders who simply do not want to deal with them. The reason behind this can be quite simple. 

Let’s say that the price of company X’s stock is $4.54. Since the price of it is lower than $5, it can be considered a penny stock. But should you buy it? It depends on several factors. First, you have to understand why the price of the stock is so low.

For starters, it can simply be the fact that the company has been performing poorly, which has had a bad impact on its stock price, and it dropped. If there is nothing exciting to be looking forward to from this company, buying its shares does not sound like the best idea.

The second reason for the price to be very low is that the company is simply brand new, and it is expected to collapse at any minute. None of these options sound like a reason for anyone to invest in them.

But, there can also be another reason - the company is totally new, with a bright future, but it has not yet been fully appreciated by everyone. This is not a common occurrence, but if it happens, it can provide early investors with huge profits. 

The thing about penny stocks is that they can be a great opportunity for you to earn more funds, but the bad thing is that it can be very hard to determine why the price of the stock is so low. Because of this, many view investing in penny stocks as a very risky idea. 

It should be noted that there is no way for anyone to consider investing in penny stocks a safe venture. The prices of these stocks are low for a reason, and if you make the wrong judgment, you might end up losing your investment. So, always do very extensive research about the penny stocks you are about to buy before making any decisions.

Some of the Best Penny Stocks to Trade

There are numerous penny stocks available in the market and choosing the best one is not the easiest thing to do. There are numerous things that your choice should depend on, but the main factors to keep in mind are the industry, historical price performance, and the earnings data of the company among many others.

At the time of writing, one of the best penny stocks to buy is Phunware. This is a very famous stock that has recently experienced massive growth of over 160 percent. This can be viewed by some investors as a sign that the price will continue to increase.

Another great stock to buy is Pluristem Therapeutics, which is a very frequently traded stock when it comes to penny stocks. The company has experienced a massive bullish performance, which makes many believe the trend will continue.

"We [!pluristem!] are a biotechnology company, a company that is using placenta cells as an off-the-shelf product" - Yaky Yanay

However, it is largely believed by stock traders that there is no single penny stock company that can be considered the best. No matter which penny stock you are trading, there will always be some kind of risk associated with it.

If you want to make further profits in the market, you must be sure about your decision on the penny stock you choose. Not all penny stocks are depreciating, which means that there are some options for traders to choose from. However, keep in mind that penny stocks are quite difficult to trade successfully.

Can Penny Stocks Go to The Moon?

Penny stocks have long had a very specific reputation in the market. While there have been several penny stocks that have had some type of increase in their price, for a long time, it was very hard to imagine that the price of any penny stock could skyrocket. 

However, several developments took place in the stock trading market that has changed this belief for traders. A great example of this is GameStop. A company, the shares of which were less than $5, was doing quite bad. Many traders thought that there was no going back and that it would close down, which made it one of the most heavily shorted stocks in the market.

Shorting is a very common activity in the stock market facilitated by mostly institutional traders or hedge funds. The way it works is that these people are borrowing a certain amount of shares and selling them right away at the market price. 

These traders believe that the price of the share will continue dropping, which will allow them to buy back the asset at a lower price and make a profit as the difference between the prices. 

Due to the fact that GameStop was shorted so heavily, some of the members of the Reddit group r/WallStreetBets decided to come together and strike against the hedge funds. Thanks to this step taken by traders, they managed to increase the price of GameStop by several hundred times, which ended up sending it to the moon.

AMC is another great example of penny stocks increasing in price dramatically. AMC was another heavily shorted stock, and it was used by online retail traders to fight against hedge funds. Things ended up playing out quite similarly to the GameStop example. 

This shows that penny stocks can somehow become quite pricey and provide investors with huge profits.

Pros & Cons of Penny Stocks

While there are many people trading penny stocks, it would be impossible to say that these stocks are the most popular types available in the market. There are numerous other types of stocks that can be traded by individuals and are a lot less risky.

If you still have not made your final decision about penny stocks, you can find the major advantages and disadvantages below.


Low prices

The biggest advantage of investing in penny stocks is quite simple - the price. Penny stocks are known for being the cheapest stocks you can buy and are usually under $5. Thanks to this low price, anyone can buy it no matter what their budget looks like.

For example, if you believe that there is a certain company that is heavily underpriced, you can buy the shares of it and wait for the price to go up to make profits. The low price also makes it easier for some people to deal with. Because the majority of traders do not invest huge amounts of money in these types of stocks, they also tend to be less worried.

Can provide huge profits

There are traders who have their own different reasons for investing in penny stocks. The first reason for doing so is that it can provide traders with quite a lot of profits. 

Let’s say that you are investing in the company, the shares of which cost only about $3. If the company manages to grow very fast and the price of the shares goes up dramatically, you will be able to make huge profits.

There have been several instances when penny stocks provided traders with huge wins and profits. This includes GME and AMC, which were very heavily shorted companies, both of them with shares costing just a few dollars. After so many people started hyping these stocks, their prices went up dramatically, providing trades with huge profits.


High risks

As much as it can be a great idea to start trading penny stocks due to their low price, there are several disadvantages to doing so. One of the biggest disadvantages of trading penny stocks is that there are numerous risks associated with them. 

The reason for this is that there can be many different reasons for the price of penny stocks to be so low. When dealing with penny stocks, there is always a risk that the price will never increase. Because of this, investors in penny stocks should always be ready to lose some of their investments.


While there are many traders who enjoy high volatility and see it as an opportunity to increase their profits further, it should be noted that there are numerous issues associated with high volatility. 

The main issue is that it can lead to traders making more wrong predictions, which can lead to them losing money. Volatility is the type of price movement in the market which is very fast and dramatic.

Things We Learned From This Penny Stocks Guide

  • Penny stocks are just like any other stocks but cost less than $5
  • Penny stocks can be a great option for beginner traders who do not want to spend much money on trading/investing
  • While they are quite cheap, there is always a chance for the price to drop further and investors can end up with losses
  • While it does not happen very frequently, the price of penny stocks can skyrocket dramatically. A great example of this is GME and AMC

FAQs on What Are Penny Stocks

Can you make money with penny stocks?

Yes, you can make money with penny stocks. But, the money that you make might not be that much. Keep in mind that a lot depends on your initial investment. If you have invested a huge amount of money in the penny stock and your prediction is correct, you can end up making a huge profit. 

Are penny stocks good for beginners?

Yes, penny stocks can be a great option for beginners. There are several reasons for this. First of all, the price of penny stocks can be quite low, which makes them very affordable. They usually cost less than $5. Other than the fact that penny stocks can actually be profitable, using these stocks can be a great option for beginners because they can expand their knowledge and experience in the market by trading these stocks.

Are penny stocks high risk?

Yes, penny stocks are very risky. There are several things that make them so risky. First of all, do not forget that there is always a reason for penny stocks to have such a low price. In some cases, their price is low simply because the performance of the company is very poor.

Also, penny stocks are usually associated with high volatility, which can further increase the risks associated with them.