---
title: "Should You Buy Penny Stocks?"
description: "Are penny stocks a smart investment in 2025? Discover the risks, scams, and strategies for navigating cheap stocks in today's market."
canonical_url: https://trendshare.org/how-to-invest/should-you-buy-penny-stocks
markdown_url: https://trendshare.org/ai/should-you-buy-penny-stocks.md
published: 2012-09-11
last_updated: 2026-02-15
content_license: https://trendshare.org/about/disclaimer
---
# Should You Buy Penny Stocks?

Source: https://trendshare.org/how-to-invest/should-you-buy-penny-stocks
Updated: 2026-02-15
Novice investors often see the value of a company in the price of its stock
alone. A stock priced at $100 seems more expensive than a stock priced at $10.
Simple logic suggests that it's easier to double your money if a stock at $10
goes to $20 than if a stock at $100 goes to $110.

Sometimes this thinking leads people to look for stocks with low share
prices. A stock priced under $5 per share has lots of room to grow, they think.
It won't take much movement in the stock's price to make a lot of money, right?
Besides, with prices that cheap, you surely have lots of options, right? All
you have to do is find a stock that will double or triple in value!

## What Are Penny Stocks in 2025?

By popular definition, a penny stock is [a stock with a very low price](https://www.investopedia.com/terms/p/pennystock.asp). There's no single definition here, but the general consensus is
that low-value companies, generally priced less than $5 per share and usually
well below $1, qualify. In technical terms, a penny stock fails to meet certain
stringent requirements to be listed on a major exchange like the NYSE or the
NASDAQ. Those requirements include the share price but also [specific financial standards](https://www.sec.gov/fast-answers/answerspennyhtm.html) and an average share price over a period of time.

What makes a company's stock a penny stock? The company behind the stock is
risky! It might be a very small company, not worth very much money. It might
have wild swings in its stock price. It might be a risky company in a very
risky business. It might have loads of debt or huge tax liabilities.

You might also hear penny stocks described as micro-caps, which refers to
their relatively small [market capitalization](https://trendshare.org/how-to-invest/what-is-market-capitalization)). For example, one stock might sell for $0.50 a share with
two million shares outstanding. The company has a market capitalization (share
price multiplied by the number of outstanding shares) of only a million
dollars—tiny compared to a big company like [Apple](/stocks/AAPL/view) or [Ford](/stocks/F/view), and
tiny compared to a normal sized company like [Corning](/stocks/GLW/view).

## Can You Find Safe Penny Stocks?

Given these fundamental characteristics, can you find good ones to buy? By
their own speculative nature and low [liquidity](https://trendshare.org/how-to-invest/what-is-liquidity),
penny stocks are easily prone to market manipulation. For a modest investment,
a malicious investor could run up the price and convince other people that the
price will continue going up and sell his shares to them at inflated prices.
This pump and dump scheme is all too common. There's no secret to finding,
picking, or buying microcaps. There's no reliable source of *any*
investing tips to find low-cost stocks that are guaranteed to rise in
value!

You must do your research to find any good stock. Plenty of stocks are
undervalued, but to *prove* that you must understand their business. Why
is the stock price so low? Is the company struggling? What are the chances it
will succeed? For penny stocks, the risks will be evident with minimal
research.

## How to Buy Penny Stocks in 2025

If you already have a good [discount stock broker](https://trendshare.org/how-to-invest/what-is-a-discount-stock-broker), you
almost already know how to buy penny stocks. Yet because they're not
traded on a standard exchange— likely instead the over the counter
market (OTCBB) or the Pink Sheets—you may have to sign a special
agreement or place a phone call and agree that, yes, you *really*
know what you're doing and you accept the additional risk of probably
losing your entire investment.

Don't be fooled by disreputable corners of the Internet which advertise free
penny stock trading. If you're not paying a commission to trade, you're making
someone else money somehow.

## Are All Cheap Stocks a Gamble?

The value in a stock comes from the business's [intrinsic value](https://trendshare.org/how-to-invest/what-is-intrinsic-value). Can the company [earn more money next year than this year](https://trendshare.org/how-to-invest/earnings-matter-most)? Does
the company have [a coherent plan to make money](https://trendshare.org/how-to-invest/before-you-buy),
and is it believable? Generally the answer is "No". If the company were really
that promising, would it still be a penny stock?

Consider also risk. Can you even *trust* the company? If it's
not meeting regulatory requirements and it's not meeting the standards
of a major market exchange like the NYSE or the NASDAQ, how trustworthy
is the company? If it's not filing reports with the SEC like other
public companies do, how much communication do you get and how accurate
is it? How much do you trust the company to treat you well as an
individual investor, with a minimum-sized investment in the company?

Worse, small stocks are often subject to extreme price volatility.
Some people see this as an advantage; the price of these stocks can
swing 10%, 20%, 50%, 100% in a day. If you're on the winning side of
that, you may enjoy it, but the losing side is no fun. (Without good
information on the company's financial picture, how can you
*predict* what will happen?)

Even if you manage to buy a cheap stock at its low point, relatively
few shares trade hands every day. If you have 1,000 shares to sell but
the rest of the world all together only wants 100 shares, you'll be left
holding 900 shares. Even if you've made a profit of 10x on what you
sold, you're still holding 900 shares. Then again, you only pay tax
when you sell, so if you're holding out for huge profits, you can ride
that investment until it proves itself a winner or totally goes
bankrupt. (Then again *again*, surely you can find better places
for your money.)

Some of the worst microcap stocks invest in [gold and silver](https://trendshare.org/how-to-invest/should-you-invest-in-gold-or-silver) and oil,
especially precious metal mining. These extremely volatile markets depend on
commodity prices, but the value of a mine also depends on the minerals it has
available and extractable. Unless you're a mineralogist, how do you expect to
review the business prospects of the mine? (Are you an expert in Canadian oil
fields and the government regulations around them? Who is?) Stay away from
these stocks!

Though people *do* make money by trading cheap stocks, people also
lose money. That's why you occasionally see spam for and scams involving penny
stocks—investors buy low, then try to drive up demand into a frenzy and
sell their own shares at the height of the frenzy. If that sounds like fraud,
it is. Whenever you see cheap stocks on the rise, ask yourself *why*
their prices are increasing. If there's no obvious business reason, you're in
risky territory.

What does that have to do with value investing? Absolutely nothing.

In the absence of reliable financial information and a solid,
trustworthy history of the company, investing in penny stocks is
speculation. It's difficult to back up your story about what a share
price may do with the kind of rigorous financial research that shows why
large companies like [McDonald](/stocks/MCD/view)'s or [Coca-Cola](/stocks/KO/view) are much, much better investments.
They have real [cash flow](https://trendshare.org/how-to-invest/what-is-free-cash-flow), for
example; they make actual money. You don't have to invest in the largest
companies in the world to find real gems, but you do have to invest in
profitable companies with real assets.

## Common Pitfalls With Penny Stocks

Be wary of claims that promise quick profits or guaranteed returns,
especially:

  - **Chasing hype and unsolicited tips:** Pump-and-dump schemes are common. Be skeptical of messages, DMs, and forums urging you to buy now. Telegram and Discord and Reddit threads can be hotbeds of misinformation!

  - **Confusing low price with undervaluation:** A $1 share can be expensive if the business is weak. Price alone is not value.

  - **Liquidity traps:** Thin trading means you may not be able to sell when you want, or only at a steep discount.

  - **Dilution and reverse splits:** Frequent share issuance or reverse splits can quietly erode your ownership and signal distress.

  - **Disclosure gaps:** Many penny stocks have limited filings. Verify basic information (for example, SEC/EDGAR) before you trust any claims.

  - **Market orders in thin markets:** Wide spreads can cause painful fills. Understand order types and execution risk.

  - **Concentration risk:** Putting too much of your portfolio into one thin, volatile name can amplify losses.

  - **Newsletter "guarantees":** If someone promises outsized returns, assume they profit from your attention, not your outcomes.

## Recent Case Snapshots

Real-world corporate events can change outcomes quickly. A low share price
does not make an "easy win". Two recent examples illustrate this.

Nautilus, Inc. became BowFlex, Inc. (NLS → BFX). The company rebranded to
BowFlex on November 1, 2023 and later filed for Chapter 11 on
March 5, 2024. Its BowFlex, Schwinn and JRNY brands were subsequently
acquired by Johnson Health Tech. Sources: [Business Wire rebrand](https://www.businesswire.com/news/home/20231031461832/en/Nautilus-Inc.-Rebrands-as-BowFlex-Inc), [CNN bankruptcy report](https://www.cnn.com/2024/03/05/business/bowflex-bankruptcy/index.html), [Johnson Health Tech acquisition note](https://www.johnsonhealthtech.com/us/eng/about-us/news/johnson-health-tech-retail-inc-expands-global-market-presence-with-renowned-fitness-brands). Retail investors lost their money.

American Airlines (AMR Corporation → American Airlines Group, AAL)
restructured via bankruptcy and merger. AMR filed for Chapter 11 on
November 29, 2011; the American/US Airways merger closed on
December 9, 2013, creating American Airlines Group (AAL). Sources: [CNN Money bankruptcy report](https://money.cnn.com/2011/11/29/news/companies/american_airlines_bankruptcy/index.htm), [Reuters merger announcement](https://www.reuters.com/article/us-americanairlines-merger-idUSBRE91D0MF20130214), [AA merger completion press release](http://www.prnewswire.com/news-releases/amr-corporation-and-us-airways-group-come-together-to-build-the-new-american-airlines-235042921.html). Unlike most penny stock bankruptcies, AMR's
equity holders received meaningful value (~72% of the merged entity, worth
billions) because the merger with US Airways created a viable combined
airline—an incredibly rare outcome for distressed equity.

Before acting on any story or hot tip, review primary filings and investor
alerts:

  - [SEC EDGAR Company Search](https://www.sec.gov/edgar/searchedgar/companysearch) — verify 10‑K/10‑Q/8‑K filings and risk factors.

  - [FINRA: Microcap/Penny Stock Fraud](https://www.finra.org/investors/insights/microcap-stock-fraud) — common scams and red flags.

## How to Verify a Penny Stock in 5 Minutes

Use this quick, educational checklist before you act on any tip or headline:

  - **Find the filings (EDGAR):** Search the company on [SEC EDGAR](https://www.sec.gov/edgar/searchedgar/companysearch). Open the latest 10-K or 10-Q. Check the *filing date* (is it current?), *Risk Factors* (Item 1A/Part II), and any late-filing notices (e.g., NT 10-Q).

  - **Auditor and going concern:** In the 10-K, look for the auditor's opinion. Note any *going concern* warning or material weaknesses in controls.

  - **Dilution and corporate actions:** Scan recent 8-Ks/S-1/S-3 reports for ATM offerings, warrants, convertibles, reverse splits, or name/ticker changes. Compare shares outstanding this year versus last year.

  - **Liquidity snapshot:** Check average daily *dollar* volume and bid-ask spread. Thin trading means harder exits; avoid market orders.

  - **Insiders and control:** Look for recent 13D/13G and Form 4 filings. Clusters of changes or related-party transactions deserve extra scrutiny.

  - **Fraud red flags (FINRA):** If promises sound guaranteed, review [FINRA's microcap fraud guidance](https://www.finra.org/investors/insights/microcap-stock-fraud) and proceed with caution.

This checklist won't predict outcomes, but it helps you validate facts fast
and avoid common traps.

## Why Trading Penny Stocks Is Risky

There are only three ways to [make money with penny stocks](https://trendshare.org/how-to-invest/how-do-you-make-money-with-penny-stocks)
in any market cycle, and they're all much more difficult than you think. If you're
the type of investor who likes to split off a small percentage of your
portfolio for risky moves—and if you can sleep at night knowing that you
could double your money or lose everything—trading penny stocks can be
entertaining. Remember, though: it's riskier than value investing and much,
much riskier than index investing.

Unfortunately, novice investors are more likely to lose money than to
get rich from penny stocks. Anyone who bends your ear about a hot
insider tip is either trying to sell you on an expensive newsletter (and
make money that way) or to seduce you with a pump and dump scam to raise
the price so he can sell it at a profit. (This is how 900 Percent Stocks
works, it appears. When you see 900percentstocks.com in comments or
reviews somewhere, run the other direction; you're looking at a
scam.)

Investing in [an index fund that tracks the S&P 500](https://personal.vanguard.com/us/FundsSnapshot?FundId=0040&FundIntExt=INT) may seem boring, but it's a lot
safer. The best penny stocks still make their money in the world of
speculation: can a company recover from bankruptcy and give you a return on
your investment? Unless you time things perfectly, you're in trouble. What
percentage of penny stocks fail? It's unclear, but it's easy to believe that
most of them do. Many businesses fail; [half of all businesses survive at least five years](https://www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf) (PDF link)—and that counts
businesses *better* than penny stocks.

Should beginners trade penny stocks? No! Should experts? If you want
to play around with a fraction of your portfolio, invest no more than 5
or 10% in penny stocks. Think of it as play money or a lottery ticket.
If you lose it, you've lost it. If you gain anything, you've gained
it.

Use your good judgment and [invest only in things you understand](http://www.dividendmonk.com/invest-in-what-you-understand/). That's how to become truly wealthy, in knowledge
and in money.