I think penny stocks are fantastic for the following:
Historical research shows that 85% of stocks trading below $2 eventually go away. That said, you have a 15% chance of even coming away with ANYTHING. Would you go to a casino that gave you 15% odds? That's probably a bad example with the luck I had the last cruise I was on (ha).
Also, FINRA considers any stock worth less than $4/share to be considered a penny stock.
hi: Most penny stocks are selling for pennies for a reason. They are likely to go bankrupt.
In most cases, penny stocks should be avoided as they are often the domain of hucksters and "pump and dump" scam artists.
This isn't financial advice, but I get the same feeling in my gut as the quotation below. I haven't tried it, nor will I.
"When I see a stock tip in my spam folder from a spammer, I feel like shorting it." - Derek Halpern
Have you ever saw what lurks at the bottom of a pond. Do you really want to fish there? Try investing and do not speculate.
I agree with Alex, never own a stock under 5$
Just say no!!!!
The answers provided thus far mostly have the correct recommendation, but I wanted to point out a few exceptions and explain the other factors at play here. I absolutely agree that in general, stocks with low share prices are riskier, may be thinly traded, susceptible to pump and dump schemes by market manipulators, and other factors previously mentioned.
No company prices its IPO at $1 and strives to only go up from there. IPOs are typically priced close to round numbers such as $10, $20, etc. so if the company is trading at say $2, there have been some missteps and adverse circumstances. Given the decline to such low levels, the investor base may change, and the only ones owning such a stock would be those who are unengaged, speculating, or those with an interest or ability to execute a "turnaround".
From strictly a numbers point of view, buying a $20 stock, that had been at $200 could be just as poor a choice, ie an investment that lost 90% of its value. Here is where this becomes different with the bright line of below or above $5.
Many institutions and funds, particularly mutual funds, will have clauses in their charter and investment policy guidelines that they are not allowed to purchase and hold stocks trading below $5. This may also be attributed to liquidity concerns as stocks below $5 have a smaller universe of buyers (other mutual funds can't buy them). During the financial crisis Citigroup traded below $5 / share. Citigroup did a reverse stock split (1 for 10), and the share price was restored, albeit artificially, to a more normal level. The difference is one of size. Citigroup as a multi-billion firm, could do a reverse stock split and still have a market cap, float, trading volume, etc. that meets exchange criteria. Small and micro-cap companies usually do not have that ability and instead find themselves in a more difficult position. The path to emerge from such a position is often through private capital raises (sometimes private investment in public equity aka PIPEs, which are typically sold at a significant discount to the market price, other times in the form of convertible debt, or a preferred stock instrument). When these transactions occur, beware as it is often a transaction of last resort, and will likely have features and terms that can be seen as coming at the expense of the existing common shareholder base.
In summary, if it is a penny stock that is being rigorously promoted by unfamiliar names, BEWARE! Companies with low stock prices have likely performed poorly, hence the situation they are in, so you should believe a turnaround is likely. Signs of a turnaround would include a new management team, a new strategy, or a restructuring of its finances or operations. Understand if there is a possibility to restore the share price through a reverse stock split or capital transaction to shore up the company's finances. Lots of micro cap companies with no analyst following and no institutional investor base, will never emerge as strong investments, however, if you do your homework you may uncover a gem. If you aren't willing to perform the diligence and understand, it is best to just stay away.