Are Penny Stocks a Good Investment?

Everybody likes a bargain, and stocks with low share prices certainly seem like bargains. With some high-priced stocks costing hundreds or even thousands of dollars for a single share, buying penny stocks -- stocks with share prices of less than $5 -- can be a tempting way to try to grow your money quickly. Penny stocks are stocks with share prices below $5 and market capitalizations below $250 million. However, penny stocks generally have a well-deserved reputation for burning investors.

It is possible to achieve strong returns by investing in young companies with small valuations or depressed stock prices. But it's typically better to invest only in companies that are larger and have less speculative valuations. Any risky stock buys should be limited to shares of companies that generate meaningful revenues -- or are pursuing clear, realistic paths to growth.

We'll delve into how to identify cheap stocks, as well as name some individual stock picks that have significant potential. But first, let's take a closer look at penny stocks and why they have such a poor reputation.

Can you make money on penny stocks?

Can you make money on penny stocks?

It is possible to make money with penny stocks. Then again, it’s technically possible to make money with any type of stock. Successful investors usually focus on the potential for their stock picks, regardless of price, to gain value over the long term.

There are plenty of good reasons to invest in small companies. Investors who buy shares in fast-growing companies that are still small capture a lot more share price upside than those who wait to buy stock until the companies have grown into giants.

However, penny stocks are almost never the bargains that they appear to be. Their shares are cheap for good reason. At best, penny stock companies are unproven and small, with dubious long-term prospects for success; at worst, penny stocks are vehicles that con artists use to take advantage of unsuspecting investors.

Penny stock investors often erroneously think that a low share price indicates that the company has greater potential to grow than those with higher share prices. In reality, the valuation of a company -- also known as its market capitalization -- is determined by two factors:

1. The stock price.
2. The number of shares outstanding.

The second factor is crucial because the number of shares issued is entirely up to the company. One million shares outstanding at $100 per share is worth exactly as much as 100 million shares outstanding at $1 per share. However, a company with a $100 share price is very likely to have much stronger growth potential than a company with a $1 share price.

Regulatory authorities know that penny stocks are highly tempting to many investors, so they're quite explicit about listing their dangers. As the U.S. Securities and Exchange Commission warns, "Investors in penny stocks should be prepared for the possibility that they may lose their whole investment." That's technically possible with any stock investment, but the total loss of value is far more likely with penny stocks.

Risks

Risks of trading penny stocks

Penny stocks come with substantial risks compared to those of ordinary stocks. The risks include the following:

1. Penny stock companies are tiny. Most publicly traded companies are large businesses that clearly demonstrate their value, which typically ranges from hundreds of millions of dollars to $1 trillion or more. By contrast, the companies that issue penny stocks are generally tiny, with even the largest penny stock companies typically valued at much less than $100 million.
2. Penny stock companies are unproven. It's rare for companies that you've already encountered in your daily life to be among the ranks of penny stocks. Rather, penny stocks are usually those of less-established companies that haven't proven they can endure and succeed.
3. Penny stocks often don't trade on major stock exchanges. While penny stocks can be listed by the New York Stock Exchange (NYSE) or the Nasdaq Composite Index (NASDAQINDEX:^IXIC), that's usually not the case. Instead, penny stocks typically trade over the counter, or OTC. Companies whose stocks trade on the OTC market are subject to less rigorous reporting requirements than those included in the NYSE and Nasdaq. Efficiently buying and selling shares of penny stocks can also be comparatively difficult because stocks that are less frequently traded are less liquid, meaning that wide ranges between bid and ask prices are common.
4. Penny stocks are sometimes the targets of pump-and-dump schemes. Con artists often target penny stock investors by promoting a penny stock company as the next hot investment. Building hype about a penny stock can pump up its share price, and the price increase itself can be misleadingly cited as evidence of the company's success.

Top penny stocks

Top penny stocks

1. Expion360

Expion360 (XPON -5.0%) is a battery-technologies specialist that designs and manufactures lithium-iron-phosphate batteries. The company produces batteries for recreational vehicles (RVs), marine applications, golf carts, and other industrial and residential purposes.

2. Inspire Veterinary Partners

Inspire Veterinary Partners (IVP -0.93%) is a company that owns veterinary and animal care practices and had its initial public offering in 2023. Inspire purchases veterinary businesses and associated real-estate holdings and aims to improve the sales and efficiency of these businesses.

Inspire Veterinary Partners (IVP -0.93%) is a company that owns veterinary and animal care practices and had its initial public offering in 2023. Inspire purchases veterinary businesses and associated real-estate holdings and aims to improve the sales and efficiency of these businesses.

3. Cognition Therapeutics

Cognition Therapeutics (CGTX 5.17%) is a clinical-stage biotech company that is trying to develop treatments for Alzheimer's disease and dementia with Lewy bodies (DLB) among other degenerative central-nervous-system disorders. As a clinical-stage biotech, Cognition Therapeutics does not yet have any treatments on the market -- but its stock could see big gains if favorable data emerges from its trials.

Better cheap investments

Better cheap investments than penny stocks

Fortunately, there are better alternatives to penny stock investing. Thanks to the rise of fractional share trading, which allows you to buy less than one share, you can often invest in stocks for which the share price is extremely high. For instance, a single share in a company like Microsoft (MSFT -0.15%) costs hundreds of dollars, but you can buy any fraction of a share and still gain portfolio exposure to the stock's future performance.

Moreover, high-quality companies can have low share prices. All of these companies' share prices were less than $10 in 2025:

• BigBear.ai (BBAI -4.66%) is an artificial intelligence (AI) software company that's concentrating on providing services to the U.S. military and other areas of the public sector. The company's stock has taken investors on a wild ride, with excitement surrounding AI sometimes powering big gains for its share price, but its valuation has retreated amid macroeconomic pressures and other risk factors. If BigBear.ai can keep winning new AI software contracts, its stock could rebound.
• Ubisoft (UBSFY -1.48%) is a developer and publisher of video games known for hit franchises, including Assassin's Creed, Rainbow Six, and Ghost Recon. The company isn't one of the strongest players in the gaming industry, but its valuation has been pushed down to levels that leave room for explosive upside. If Ubisoft can deliver a single new successful series or major breakout title, the stock could see a renewed surge of bullish momentum.
• Himax Technologies (HIMX 4.29%) designs semiconductors that regulate the colors displayed by pixels on screens. In addition to smartphones, tablets, and TVs, the company has big growth opportunities in the automotive market. It could also score big wins if demand for virtual-reality and augmented-reality headsets increases.

These are just a few of the stocks that you can buy without spending a lot for each share. Investors who are willing to assume high risk to potentially achieve high returns have plenty of options that offer better risk-reward dynamics than penny stocks.

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How to invest

How to invest in penny stocks (if you're dead-set on doing so)

If we can't persuade you not to invest in penny stocks, then you should at least follow these basic precautions to protect your portfolio:

1. Open your brokerage app: Log in to your brokerage account where you handle your investments.
2. Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
3. Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
4. Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
5. Submit your order: Confirm the details and submit your buy order.
6. Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.