Can You Get Rich From Penny Stocks?

Every investor dreams of finding the next Amazon.com, Google or Apple. But even the biggest companies need to start somewhere. Penny stocks are low-priced stocks that represent almost unlimited market potential and allow you to invest in a range of different industries without thousands of dollars of capital.

While penny stocks can provide plenty of opportunities for profit, they also come with risks that you’ll need to understand before you invest. Our guide to penny stock investing will help you learn more about the potential of penny stocks and some of the risks that come with these investments. 

Penny Stock Attributes

When most investors think of the phrase “penny stock,” their minds immediately go to shares of stock that are trading for less than $1 per share. Though previous definitions of penny stocks have only included stocks that trade for that, the U.S. Securities Exchange Commission (SEC) has expanded its definition to include all stocks that trade at less than $5 per share.

In addition to price, there are a few characteristics that you may notice with penny stocks of varying companies:

• Smaller companies: “Market capitalization” is the total dollar value of all outstanding securities issued by an individual company. Most penny stocks are issued by smaller companies with low market capitalizations.
• Limited availability on major exchanges: Though many penny stocks trade on major exchanges like the New York Stock Exchange and the Nasdaq, the vast majority of penny stocks cannot meet the minimum requirements for listing on these exchanges. This means that you could need access to an over-the-counter (OTC) exchange to buy and sell many penny stocks.
• Lower liquidity: Because many penny stocks represent smaller companies, there may not be as much demand for stocks when compared to those listed on major exchanges. This means that you could have a harder time buying and selling the shares you want and see a larger bid-ask spread on your brokerage account.

Although there are plenty of legitimate penny stocks, low-priced stocks have a notorious history of price manipulation. If you do decide to invest in any penny stock, be sure to do your research and only invest a small percentage of your overall capital in these riskier securities. 

Traders Who Got Rich from Penny Stocks

At a price of less than $5 per share, the idea of a penny stock turning into a massive, multimillion-dollar corporation might seem far-fetched. While penny stocks are less likely to reach mega-cap status, every successful company must start its journey somewhere. Let’s take a look at a few examples of stocks that used to trade as penny stocks but later moved up in value, earning early investors plenty of cash.

• Amazon.com (NASDAQ: AMZN): That’s right — among the largest companies in the world once traded at less than $5 per share. After accounting for Amazon’s 3-to-1 stock splits, you would have paid about $1.50 for 1 share of Amazon’s stock at its initial public offering (IPO). Today, a single share of Amazon’s stock is worth about $3,204. Investors who put just $100 in Amazon at its IPO date would have well over $213,000 if they sold their shares today.
• Monster Beverages (NYSE: MNST): Another major penny stock winner was Monster Beverages, which held its IPO in January 2003. Entering the market at just $0.10 per share, Monster Energy was a true penny stock — and today, its stock is worth over $88 per share. Investors who put just $10 worth of their capital into Monster at its IPO would have over $8,800 if they sold their shares today.
• Blink Charging (NASDAQ: BLNK): Think that the penny stocks of the past hold more power than those you can buy today? Blink Charging is a prime example of the modern power of penny stocks. In June 2020, you could purchase a single share of Blink Charging for about $3.02. Just 6 months later in December, the exact share of stock is now worth $46. Investors who had put $1,000 of their capital into Blink Charging in June would have over $15,000 if they sold their shares today.

As you can see, even small penny stocks have the potential to return massive profits. Even the largest companies must start somewhere — and plenty of investors have earned very large returns by investing strategically in the right places. 

How to Find the Best Penny Stocks

How can you separate the thousands of penny stocks that don’t produce returns from those that do? Unfortunately, there’s no magic formula that can tell you exactly which stocks to buy — and you should be wary of any investing gurus that promise guaranteed returns if you use their courses or buy their watchlists. However, you should look at a few of these things when you compare penny stocks:

• Company history: Although it can be a bit more difficult to find company history and data for smaller and newer companies, you should still gather as much information as you can before you invest. Check to see if the company is competitive in its sector and search for strong fundamentals to locate the best options.
• Trading on a major exchange: It’s usually a good idea to start out by investing in penny stocks that trade on major exchanges like the NYSE. Stocks listed on major exchanges must meet minimum financial and disclosure requirements, which makes them more reliable choices when compared to the penny stocks you’ll find on OTC exchanges.
• Higher volume: Penny stocks often have less interest in them when compared to larger offerings, which can make buying the stock and exiting your positions more difficult. Look for penny stocks with higher average daily trading volumes to ensure that you’ll be able to close out of your position at the price you need when you decide to take your profits. This is a particularly important consideration for day traders. 

Using Scanners to Find Penny Stocks

A stock screener is a tool that you can use to narrow down the thousands of stocks available on the market to find penny stocks that fit your needs. Stock screeners allow you to use criteria like price, volatility, average daily trading volume and many additional factors to help find new trading opportunities or to get a better picture of how the market is moving each day.

There is a wide range of both free and paid stock screeners available to you. If you aren’t sure where to begin, consider a few of our favorite options below.

The Risk in Penny Stocks

Although penny stocks can provide you with unparalleled investing opportunities, they also come with massive risks. Here are a few of the factors that make penny stocks risky investments.

• High volatility: Because penny stocks have lower price points, investors can purchase more individual shares on a single order. When combined with lower liquidity, this means that the price of penny stocks can be exceptionally volatile. While this might mean higher profits if the price goes up after you purchase, it can also compound your losses if the price moves in the opposite direction.
• Less public information on each company: When you buy and sell shares of stock issued by major corporations, you’ll have access to a wealth of SEC data and expert analyses. This makes it more difficult to do your due diligence and know exactly what you’re buying into when you purchase penny stocks.
• Greater possibility of manipulation: Penny stocks have gained an infamous reputation for being involved in “pump and dump” schemes because their lower price point makes manipulation easier. During a pump and dump scheme, marketers or shareholders intentionally spread false or misleading information about a particular stock they’re holding, causing the price of the stock to skyrocket. Once the price peaks, the inside investors “dump” their holdings onto new investors buying in after hearing the news at inflated prices. From here, the stock price usually falls back down to the correct market rate. 

Best Penny Stocks Right Now

The best penny stocks to invest in can change on a daily basis depending on market movements and your unique investing style. To stay up to date on which penny stocks are worth investing in, we recommend checking out our daily penny stock selections and signing up for our penny stock trading newsletter to get recommendations customized to the changing market. 

Best Online Brokers for Penny Stocks

Investing in penny stocks (or any type of stock) starts with a great broker. A brokerage account is an online investing account that allows you to buy and sell shares of stock using your broker’s unique trading platform. If you don’t already have a brokerage account, consider a few of our favorite options below.  

Pennies in Your Portfolio

Investing in penny stocks can be exciting — you gain access to a wider number of companies and exposure in more markets with a relatively small amount of capital. If you’re interested in penny stocks, don’t be afraid to purchase a few shares of companies that seem to have strong fundamentals. Remember that investing in penny stocks can also be risky — so you should never invest more money than you can afford to lose in these smaller offerings.