Key Points
- Penny stocks are riskier than other investments.
- There's often too little information to make informed investments.
- There are better alternatives available.
Penny stocks may seem like an affordable investment option for people without much money to invest. After all, penny stocks have prices under $5 per share, so even if you have only a little bit of cash, you should be able to purchase just about any penny stock you're interested in.
The reality, though, is that these stocks are almost always a high-risk investment with a very small chance of a generous return. And there's a better solution now for those without big investment account balances, so there's every reason to swear off penny stocks forever in 2022.
Why you should steer clear of penny stocks
Penny stocks may seem like an affordable way to get started investing in stocks. But the reality is that shares of these companies often cost so little for a good reason.
While some penny stocks are simply unproven companies that haven't yet had a chance to grow, others are used as part of pump and dump schemes by unscrupulous individuals who build up hype around untested companies to drive up the share price. They then sell their shares at a quick profit while leaving later investors holding the bag.
It can be difficult to tell which penny stocks are the diamonds in the rough and which aren't even worth their meager share price, because these low-value stocks aren't sold on stock exchanges and thus aren't as tightly regulated as companies that trade on the New York Stock Exchange or the Nasdaq. They don't have to follow the same reporting requirements, and information about the companies may not be widely available or 100% accurate.
And even in the best-case scenario, when you think you've found a high-quality penny stock, trading it can be difficult because these companies aren't listed on major stock exchanges and there's not as much buyer demand for them.
The challenges in researching penny stocks, and buying and selling them, all combine to mean that trading in these assets simply isn't worth it.
What you should invest in instead
If you don't have a lot of money to invest, it may be frustrating to hear you should swear off penny stocks, because they may be some of the few shares that seem affordable to you. After all, if you have $10 or $20 that you want to put in the market and most publicly trading companies have a share price that's well above that amount, you may feel closed out of trading equities entirely.
The good news is that a small account balance is no longer a reason to invest in penny stocks, because you can buy fractional shares instead.
Fractional shares are available from a growing number of brokerage firms, many of which allow you to buy partial shares of stock regardless of the share price as long as you meet their low minimum purchase requirements. These requirements are easy to satisfy, with some brokers allowing you to execute trades with transaction values as low as a penny as long as you're buying at least .001 of a share.
Thanks to fractional shares, if you have $10 to invest, you could choose to buy 1/10 of a share of a stock that sells for $100 per share, or 1/100 of a company selling at $1,000 per share, and so on. This opens up the door to buying any investment you want -- including big-name companies that trade on major stock exchanges.
So instead of buying penny stocks in 2022 and beyond, opt for fractional shares of trusted companies instead. You stand a much better chance of investing successfully with this approach.
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