Penny stocks can be riskier than any other stock. Here's why they're so dangerous. (2024)

Outside of the mainstream stock exchanges, there is a lesser known marketplace with divergent regulations and low-priced "penny" stocks — which despite the name — trade at $5 and below and may lure in unsuspecting investors looking for wealth on Wall Street.

Through the years, authorities have busted massive penny-stock scams that have defrauded thousands of investors out of millions of dollars, but fraudsters are still out there.

"I'm getting a lot of calls from investors who are duped and getting scammed by-penny stock operators," Jacob Zamansky, attorney with his firm Zamansky LLC, told CNBC.

These so-called over-the-counter equities markets have experienced steady increases in trading activity, spiking in 2021, according to data from the Financial Industry Regulatory Authority.

Penny stocks

Although there is nothing inherently wrong with low-priced stocks, they are considered speculative, high-risk investments because they experience higher volatility and lower liquidity. For example, if you buy a penny stock and then decide you want to sell it, it could be more difficult for you to find a buyer.

"At the end of the day, you're buying something in the stock market, someone else is selling it. So, you have to think about who might be the other person on the other side of the trade," Andres Vinelli, chief economist at the CFA Institute, told CNBC.

OTC markets require different, varying financial reporting. This lack of transparency makes it easier for fraudsters to manipulate information and misrepresent financials. If paired with unscrupulous stock promoters making exaggerated claims, investors can become victims.

"It all kind of comes together as the perfect storm of opportunity for criminal enterprises," Greg Ruppert, head of FINRA's member supervision organization, told CNBC. "Certain statements or claims could be made that are not readily verifiable or easily investigated or tracked."

The Wolf Of Wall Street

Jordan Belfort orchestrated one of the most notorious penny-stock scams in history through his brokerage firm, Stratton Oakmont, which was portrayed in the 2013 movie "The Wolf Of Wall Street," starring Leonardo DiCaprio.

"He really was a character as Leonardo DiCaprio portrays him in the movie," Zamansky told CNBC. "He had an expression. He sold steaks to restaurants to start with. And he said, If I can sell steaks, I can sell stocks."

Before Zamansky started representing investors who were abused by Wall Street firms, he was an attorney for Stratton Oakmont. That's where he learned about the business of penny stocks.

"I have to say I learned all the dirty tricks of Wall Street from representing those folks, and I used my knowledge to help investors, starting in 1998," Zamansky told CNBC.

Innocent investors bought into Belfort's sales pitch, which artificially pumped up stock valuations. Then, the firm would sell its shares. That's known as a "pump and dump" scheme.

"What I didn't know, which the SEC later found out, is that [Stratton Oakmont] had their own positions in these stocks. They would sell out," Zamansky said, referencing the Securities and Exchange Commission. "And, the customers would be left holding the bag."

Eventually, the scam collapsed, and Belfort was convicted of fraud and served time in prison.

Belfort did not respond to CNBC's request for an interview but in CNBC's "Bitcoin: Boom or Bust" 2018 documentary, he spoke about his time as a scammer and how he's turned around his act.

"I was a scammer. I was. [I'm] the first to admit it," Belfort told CNBC in 2018. "I would say most of my firm was legitimate, but there was a portion of my firm that wasn't."

But, this is just one example of penny-stock fraud.

Watch the video above to learn more about how ultra low-priced stocks inspired a new breed of investors, high-stakes gamblers, risk-taking fraudsters and enforcement crackdowns.

Penny stocks can be riskier than any other stock. Here's why they're so dangerous. (2024)


Penny stocks can be riskier than any other stock. Here's why they're so dangerous.? ›

Although there is nothing inherently wrong with low-priced stocks, they are considered speculative, high-risk investments because they experience higher volatility and lower liquidity. For example, if you buy a penny stock and then decide you want to sell it, it could be more difficult for you to find a buyer.

Why are penny stocks riskier than blue chip stocks? ›

Penny stocks can also be more easily manipulated than most stocks that trade on exchanges because of their generally low trading levels and the resulting price volatility.

Do penny stocks ever recover? ›

In a best-case scenario, a penny stock has likely significantly underperformed the expectations of company management or it wouldn't be trading at such a low share price in the first place. These types of companies can always rebound, but an underperforming company isn't an ideal investment.

What are the disadvantages of penny stocks? ›

Due to their low liquidity and small market capitalisation, they are susceptible to price manipulation, fraud, and sudden declines. Investors may experience substantial losses, and some penny stocks may even become worthless.

What is the failure rate of penny stocks? ›

Penny stocks and OTC stocks have an average negative annual return of 24%. Over 90% of penny stocks fail. What are OTC and penny stocks?

Should I stay away from penny stocks? ›

Risks of Penny Stocks

While you might think the risks are low when prices are also low, penny stocks tend to carry much higher risk than stocks that trade on major exchanges. This makes it easier to lose money, no matter what the size of your investment.

Why not to invest in penny stocks? ›

Penny stocks come with high risks and the potential for above-average returns, and investing in them requires care and caution. Because of their inherent risks, few full-service brokerages even offer penny stocks to their clients.

Has anyone ever got rich off penny stocks? ›

Speculative stocks aren't for the faint of heart. However, it remains true that penny stocks do make investors rich. They remain one of the quickest ways to multiply an investor's capital. If you can get past limited disclosures and liquidity issues, real money can be made by investing in penny stocks.

What is the hottest penny stock right now? ›

Most Active Penny Stocks
  • GGB4.460.14% Gerdau S.A.
  • MPW4.740.75% Medical Properties Trust, Inc.
  • CNXA1.500.42% Connexa Sports Technologies Inc.
  • ICCM1.350.11% IceCure Medical Ltd.
  • JAGX0.120.03% Jaguar Health, Inc.
  • FSRN0.050.03% Fisker Inc.
  • TPET0.630.11% Trio Petroleum Corp.
  • HUBC1.950.65% HUB Cyber Security Ltd.

What penny stock will skyrocket in 2024? ›

Here, we'll take a look at penny stock Rocket Lab (RKLB), a private aerospace company that Wall Street analysts predict will skyrocket by the end of 2024.

Why do people bash penny stocks? ›

Stock bashers disseminate misinformation in the hopes that investors will believe the false claims and sell their stock before the price drops. These individuals often target low-priced companies that have little to no available information on the market and may have positions in assets whose prices fall.

Which is the best penny stocks to buy? ›

Best Penny Stocks: Definition, Features, Types & Top List of Penny Shares
  • Sunshine Capital Ltd.
  • Standard Capital Markets Ltd.
  • G G Engineering Ltd.
  • Globe Textiles (India) Ltd.
  • Growington Ventures India Ltd.
  • Aakash Exploration Services Ltd.
  • Debock Industries Ltd.
  • Kenvi Jewels Ltd.
Apr 10, 2024

What is a good market cap for a penny stock? ›

Penny stocks, as defined by the U.S. Securities and Exchange Commission, are securities issued by companies that have a market cap of less than $250 million or $300 million. 1 Some experts choose to adopt a cut-off value of $1 per share.

Why are blue chip stocks less risky? ›

Advantages and Disadvantages of Blue Chip Stocks

Low Risk: As industry leaders with reliable cash flows and long histories of paying their debts, blue chip companies are considered to be low risk. They are unlikely to suffer from a sudden credit or liquidity crunch.

Why are blue chip stocks not risky? ›

Blue chip stocks are usually less risky and thus considered safer than other stock-based investment options. That's because one of the major determining factors of a blue chip stock is that it must be a well-capitalized company, meaning it should have the financial fortitude to endure an inevitable economic downturn.

Are pennystocks less risky than blue chip stocks? ›

If you are willing to take risks for quick gains, penny stocks are great for you. However, blue-chip stocks may be the right investment choice for you if you have a low-risk appetite and want stability. Based on your risk appetite and your investment goals, you can choose the one that suits you best.

What are 2 advantages and 2 disadvantages of penny stocks? ›

Pros and Cons Of Investing In Penny Stocks
Low-costUnpredictable pricing
Chance of high returnsLimited information
Chances of overnight gainsLow liquidity
Prone to scams
Feb 22, 2022


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