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Should You Invest Your Stimulus Check in Penny Stocks?

By Katie Brockman - Mar 18, 2021 at 5:30AM

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Are penny stocks the right investment for you?

Stimulus checks are currently on their way to millions of Americans' bank accounts. Under the newest relief bill, individuals earning $75,000 or less per year are eligible to receive a $1,400 stimulus check. Married couples can receive a total of $2,800, and you're also entitled to an additional $1,400 for each dependent.

Many households desperately need this money to pay rent or put food on the table. In addition, if you don't already have a robust emergency fund, it's wise to stash your stimulus money in a savings account.

However, if your finances are healthy and you can afford to pay all your bills right now, you may choose to invest your stimulus money. Investing in penny stocks may be appealing, but is it the right move for you?

Penny sitting on a pile of assorted bills

Image source: Getty Images.

What are penny stocks?

Penny stocks are defined as any stock that trades for less than $5 per share, and many trade for $1 or less per share.

It's easy to see the appeal of penny stocks. When popular stocks like Amazon or Tesla are trading for hundreds or thousands of dollars per share, it's hard for investors on a budget to get in the game. If you only have $1,400 to invest, you could buy thousands of shares of penny stocks, compared to maybe one or two shares of a more expensive stock.

However, penny stocks are cheap for a reason. They're incredibly dangerous investments, and you risk losing more than you gain. A few of the risks include:

  • Fluctuating stock prices: Penny stock prices can fluctuate wildly, which means they can potentially plummet in value overnight. 
  • They can be harder to sell: There aren't as many buyers for penny stocks, so when you're ready to sell your investments, you may have a tough time. This is especially risky considering penny stocks' fluctuating prices, because the price could drop significantly by the time you're able to sell.
  • They're harder to research: Companies that issue penny stocks are generally smaller businesses. These organizations often don't have a long track record, so it's tougher to determine whether they're solid businesses. Without that knowledge, it's almost impossible to tell whether the stock you're investing in is a winner or a loser.

It's possible to make money by investing in penny stocks, but you could just as easily lose everything. Fortunately, though, there's another type of investment that carries less risk but is just as affordable.

Where to invest instead

Even if you don't have much money to invest, it's still possible to invest in big-name stocks through fractional shares. When you invest in fractional shares, you're investing in just a small portion of a single share of stock. This way, it's possible to invest in stocks like Apple, Amazon, or Tesla for as little as $1.

There are several benefits of investing in fractional shares rather than penny stocks. Penny stocks are affordable, but the companies themselves are often risky. With fractional shares, you're still investing in solid, healthy companies, but at a lower price.

Man in a suit behind a scale with coins on both sides

Image source: Getty Images.

In addition, it's easier to build a diversified portfolio with fractional shares. If you have $1,400 to invest, you can invest in dozens of different stocks for the same amount of money as buying one or two full shares of an expensive stock.

Finally, fractional shares can be a good way to get your feet wet in the investing world. If you're nervous about investing and don't want to sink thousands of dollars into the stock market, you can invest a relatively small amount in a variety of strong stocks.

You have plenty of options if you decide to invest your stimulus check. Some of those options are better than others, however. By avoiding penny stocks and investing with fractional shares instead, you can make the most of your stimulus money.

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