The Risks and Rewards of Penny Stocks

Global Business

The idea of making a million dollars out of a couple hundred dollars is a very enticing prospect. That’s why low priced stocks known as “penny stocks” are attractive among those looking to get rich with just a little capital. While some have made vast amounts of money investing in them, they are considered very risky investments. CCTV’s Karina Huber has more. 

The Risks and Rewards of Penny Stocks

The Risks and Rewards of Penny Stocks

The idea of making a million dollars out of a couple hundred dollars is a very enticing prospect. That's why low priced stocks known as "penny stocks" are attractive among those looking to get rich with just a little capital. While some have made vast amounts of money investing in them, they are considered very risky investments. CCTV’s Karina Huber has more.
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“I got started in high school…into 2 million.”

This is Tim Sykes, probably the most famous penny stock investor out there. He made millions investing in low priced stocks and now teaches others how to invest in them too.

“Penny Stocks are speculative investments trading under 5 dollars a share. That’s what I specialize in.”

While Sykes made millions, others like Arjun Nanda first made lots of money investing in them and then lost everything.

Arjun Nanda, investor, says: “In 2012, for every dollar that I invested at the beginning of the year, I made 45 times. A year later, in 2013, every single penny that I made, I lost.”

Nanda worked in the financial services industry for eight years. Now he works for himself trading with his own money. He now only invests in well-known companies but he once invested in penny stocks partially because it was exciting.

Arjun Nanda also tells the reporter: “It’s a really interesting space. There’s a lot of volatility which leads to huge gains and potentially huge losses.”

There isn’t a huge market for penny stocks. This lack of liquidity can lead to big swings in prices. And there are other risks.

Penny stocks aren’t usually traded on the major exchanges like the New York Stock Exchange or the NASDAQ which require companies to adhere to strict rules set by the Securities and Exchange Commission.

Benjamin Wey, CEO, New York Global Group, says: “There are no filing requirements in terms of quarterly annual reports and disclosures. And there are not even financial statements required. Those are very risky investments.”

And finding reliable information about a particular company becomes much more difficult. Many retail investors end up vulnerable to email blasts like this one created by a public relations firm hired by the company promising the potential of fortune.

Benjamin Wey also says: “Whenever you open your email, you see somebody recommending you a stock. It trades at 5 cents a share. It will go to 10 cents. What I suggest. Click. Delete. Move on.”

But investing in penny stocks isn’t all doom and gloom. There is the potential to make a lot of money with very little capital and it can be a lot of fun. As Arjun Nanda says, “Hugely exciting but it’s not sustainable.”