Ashley Asks A Question: If penny stocks are so cheap why don't more people invest in them?

wolf-of-wall-street-600x438 Welcome back to Ashley asks a question. I'm Ashley, resident money novice at Wela. Every other week I ask our COO Eddie Goepp a question about something that has either confused me or fascinated me in the last 24 hours. Or, TBH, something I'm too lazy to Google. Catch up on other stuff I was too lazy to google here.

Let's get to it.

If penny stocks are so cheap, why don't more people invest in them?

Eddie's answer

Great question…kind of reminds me of the Seinfeld scene about Ovaltine. What’s the deal with penny stocks? Are they really only a penny?

So actually the definition of a penny stock can be a little confusing because there is not a defined price at which a stock becomes a penny stock. Some people consider it a penny stock if it’s under $5 per share while others say it needs to be under $1 per share.

A penny stock is actually a stock that trades at a relatively low price and market capitalization (meaning it’s a small company), usually not on one of the major market exchanges, like the New York Stock Exchange or the NASDAQ. These types of stocks are generally considered to be highly speculative and high risk because they aren’t very liquid (meaning it’s hard to sell them if you want to get out fast) and the company will also generally be subject to limited listing requirements along with fewer filing and regulatory standards.

So despite seeing a low price on the share of stock, there are many unknown and speculative risks with buying penny stocks. In other words, it’s not a great strategy for building long-term and lasting wealth. If you like the idea of gambling, then a penny stock may be right up your alley but we wouldn’t recommend investing any more than you’re willing to lose completely.

Bottom line: Investing in penny stocks can be entertaining but they're not going to get you to early retirement. Also, they can be a bit scammy a la Wolf of Wallstreet.