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Don't Waste Your Money on Penny Stocks, These 3 Stocks Are Better Buys

By Chris Neiger – Nov 2, 2019 at 6:10AM

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You can gamble your hard-earned money away, or you could pick three long-term winners.

Some investors are looking for a fast-track to building wealth, and that pursuit sometimes leads them toward penny stocks. After all, these stocks look inexpensive, and the payoff could be huge, right? The problem with this investing strategy, if you can call it that, is that penny stocks are notoriously volatile, and their businesses are often murkier than those of other publicly traded companies. And most importantly, you're far more likely to lose money buying a penny stock than buying stocks in good companies and holding onto it for years.

If you're tempted to go the penny stock route, reconsider that decision by first looking at how Microsoft (MSFT -0.78%), Amazon (AMZN -1.00%), and Square (SQ -1.41%) have generated solid long-term returns for their investors and set themselves up for future growth. 

A penny sitting on top of other pennies.

Image source: Getty Images.


Microsoft may seem like a boring tech stalwart, but the company is a leader in emerging tech trends, including cloud computing and artificial intelligence. 

Take, for example, the company's AI services offered through its Azure cloud computing platform. The company's cognitive services help developers create apps and services that do language translation and image recognition, and perform basic independent reasoning. The company's early moves with artificial intelligence are helping tap into growing AI market, which could be worth $15.7 trillion by 2030. 

Additionally, Microsoft is a leading player in the cloud computing market, which will be worth an estimated $331 billion by 2022. The company currently holds about 18% of the market, making it the No. 2 public cloud computing player behind Amazon. Notably, the company was just awarded a $10 billion cloud-computing contract from the U.S. government.

Lastly, Microsoft has done a great job growing its key revenue segments, with the company's Productivity and Business Processes revenue increasing 13%, Intelligent Cloud revenue growing 27%, and More Personal Computing sales up 4% in the most recent quarter. Those results helped push up Microsoft's total sales up 14% compared to the year-ago quarter.


Amazon is the leading cloud computing player and easily outpaces its competitors in the space with 32% of the market. While Amazon is facing increasing competition from Microsoft, the company still increased its Amazon Web Services (the company's cloud computing service) by 35% in the most recent quarter. 

Amazon also has a corner on the U.S. e-commerce market as well. About 38% of all online sales in the U.S. occur on the company's website right now. That's impressive enough on its own, but investors also need to understand that the e-commerce market still has a lot of room to grow. This year, just 11% of U.S. retail sales will occur online, which leaves plenty more room for Amazon to benefit from e-commerce growth as more Americans shift their spending from brick-and-mortar stores to online shops. 

Investors may be concerned about Amazon's recent 10% share price drop over the past six months. But with the company holding a leading position in both cloud computing and e-commerce, the recent share price slide represents a solid buying opportunity. Amazon's dominance in its various markets isn't going away any time soon, which means that long-term and patient investors will likely continue to be rewarded with this company.


If you're willing to stomach a little more volatility, but still want to invest in a company that's far more stable than a penny stock, then Square may be a good fit. Square is an online payment processing company that's benefiting from the shift from physical money to digital payments. 

Square's payment processing platform is growing quickly, and the company processed $26.8 billion in global payment volume in the most recent quarter, up 25% year over year. The company's growth in this market is important to take note of, because digital payments will be worth an estimated $7.6 trillion by 2024.

Square is already benefiting from merchants expanding their payment processing needs, and in the most recent quarter the company's total sales jumped 44%. But Square is also tapping into the mobile peer-to-peer payment market with its Square Cash app. The app allows users to pay each other easily, and the company has already turned this service into a $500 million business.

The bottom line

For investors looking for great ways to invest their money, these stocks are much better bets than penny stocks. Sure, it can be tempting to play out "what if" scenarios when considering penny stock investments, but the proven way to make money investing is to find great companies, buy their stocks, and hold onto them for the long term.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Microsoft, and Square and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2020 $70 puts on Square. The Motley Fool has a disclosure policy.

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