Every investor wants to make as much money as possible in the stock market, and it can be tempting to take on riskier investments in hopes of getting rich overnight.
The unfortunate truth, though, is that there's no way to "get rich quick" in the stock market -- at least without facing the risk of losing more than you gain. While these three types of investments may seem promising on the surface, they can cost you more than you think.
1. Penny stocks
Penny stocks are stocks that trade for very low prices -- typically $1 or less per share. Their affordability makes them an appealing option, especially if you can't afford to invest much.
However, penny stocks are one of the riskiest types of investments. It's tough to research penny stocks, primarily because they're usually offered by smaller companies. These companies often don't have much information that's available to the public, and they usually don't have an extensive history either. When you can't research the company's fundamentals, it's nearly impossible to determine whether it's a solid investment.
Also, penny stocks are more volatile and harder to sell. Say you buy a couple of hundred shares of a penny stock, but soon afterward you have a feeling the price is going to drop. You try to sell your investments, but there are currently no buyers. After a few days, the stock price tanks, and your investments have plummeted in value before you got the chance to sell.
Where to invest instead: A better alternative to penny stocks is to invest in fractional shares. Like penny stocks, fractional shares are affordable (you can buy fractional shares of stock for as little as $1). The difference, though, is that with fractional shares, you can buy small slices of big-name companies. That makes fractional shares much less risky. Rather than betting on small companies with no track record, you can invest in the best and the biggest stocks for just a few dollars.
2. Meme stocks
A meme stock is any stock that has seen tremendous price increases as a result of online investors pumping up its stock price. GameStop (NYSE:GME) and AMC Entertainment Holdings (NYSE:AMC), for example, are two of the most prominent meme stocks.
The problem with meme stocks is that their stock price increases have more to do with internet hype rather than the company's fundamentals. When GameStop saw its meteoric rise earlier this year, for example, it wasn't because the company itself was financially healthy. Rather, it was because investors in the online community Reddit were promoting the stock to artificially raise its stock price.
It is possible to make money by investing in meme stocks, but it takes an incredible amount of luck. Because these stocks' prices have been artificially inflated, they're bound to crash at some point. If you don't sell your stocks at just the right moment before the price collapses, you could lose a lot of money.
Where to invest instead: If you want to invest in up-and-coming companies that are likely to experience higher-than-average returns, a safer bet may be to invest in growth stocks. A growth stock is any stock that has the potential to earn above-average returns. The difference between growth stocks and meme stocks is that growth stocks have solid fundamentals. If the company grows and its stock price increases, it's likely because it's a healthy company -- and that is what makes for a good long-term investment.
NFTs, or non-fungible tokens, are the latest phenomenon in the investing world. NFTs allow people to invest in digital art, whether it's a video clip, a digital painting, or a meme. When you buy an NFT, you are the sole owner of that particular piece of art. So even if there are other copies online, you are the only one who owns the original.
You can make money investing in NFTs. Take digital artist Beeple, for example, who sold a digital piece of art for a whopping $69 million. However, there is a substantial amount of risk involved in this type of investing.
Making money with NFTs involves selling your investment for more than you paid for it. The problem is that the world of selling digital artwork is new territory, and nobody knows exactly what these pieces are worth. So if you buy a piece of digital art, you could potentially sell it for thousands of dollars. Or it might be worthless and you won't be able to sell it at all.
Where to invest instead: If you're eager to get involved in new investing trends, cryptocurrencies might be a better option. However, investing in cryptocurrencies themselves can also be incredibly risky, so a safer bet is to invest in crypto stocks. A crypto stock is a company that has some type of investment in cryptocurrency. Tesla (NASDAQ:TSLA), for example, recently announced its $1.5 billion investment in Bitcoin. Tesla would be considered a crypto stock, and it's a lot safer than investing in Bitcoin directly.
It can be tempting to invest in riskier places to increase your earning potential, but there's a greater chance you'll lose money than become an overnight millionaire. By sticking to safer investments and taking a long-term approach, you're more likely to build wealth over time.