Please Don’t Buy Penny Stocks

I can’t think of a worse investment than penny stocks. Maybe a Ponzi Scheme is worse? Debatable.

Penny stocks seem to be gaining popularity as a water cooler investment. They are esoteric. They seem to require a lot of research. Similar to cannabis stocks, crypto, and Gamestop, they are fun to talk about.

Piggy banks with spilled pennies
Putting pennies in cute piggy banks. A way better investment than penny stocks.

The overall idea is that most are bad, but if you “do your research”, you can find a winner. Take any penny stock. If you cherry pick a time frame, you can find a period where you would have made a huge return.

It ain’t happening. When you buy and sell a penny stock, you have to cross the bid-ask spread for that stock. The bid-ask is the difference between what the market is willing to sell or buy that security for. And that spread is going to completely wipe out the positive price movement you achieved holding the stock. Even if you managed to time the wild market swings for these securities correctly.

In fact, average annualized realized returns for investing in penny stocks is a ridiculous -30%. I don’t have much else to say, these are just terrible investments. Why spend time meticulously researching an investment that will almost certainly lose you money, when you can instead spend very little time implementing a low fee asset allocation and indexing strategy?

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