Everyone loves a bargain, and that’s a big part of the appeal of penny stocks. These cheap stocks provide the opportunity for you to invest in a company at a bargain-basement price. If you choose the right stock, you could make a big profit.
But with the potential for high rewards also comes a very high level of risk, so keep reading to find out all about the pros and cons of investing in penny stocks.
Penny stocks are cheap shares of small companies. Also called micro-cap stocks, these companies are often newly listed, have a market cap of less than $300 million, and usually trade for less than $5.
Penny stocks are commonly found across a variety of market sectors, and they’re often highly speculative. For example, a penny stock could be a mining company exploring a new mineral deposit, a pharmaceutical company developing a new drug, or a tech firm launching a new gadget or technology.
Investors are often attracted to penny stocks for their low prices and potential growth opportunities. But there are several risks involved with investing in penny stocks too, so it’s essential to understand those risks before buying any cheap stocks.
Keep in mind that penny stocks carry a high degree of risk and volatility. While these picks were active at the time of writing, investors should perform their own due diligence as market conditions and availability can shift quickly.
| Penny stock | Stock price | Market cap | YTD performance | Buy on Qtrade |
|---|---|---|---|---|
| Plug Power (PLUG) | $2.13 | $2.9 billion (USD) | -93.87% | |
| Medical Care Technologies (ASST) | $0.68 | $1 billion (USD) | (data unavailable) | |
| Primior Holdings (SAFX) | $0.89 | $5.7 million (USD) | (data unavailable) | |
| CNBX Pharmaceuticals (CNBX) | $0.00 | $174,153 (USD) | -99.9% | |
| Boqii Holding (BQ) | $1.47 | $7.3 million (USD) | -98.57% | |
| Sangamo Therapeutics (SGMO) | $0.57 | $180.2 million (USD) | -96.77% | |
| Eventbrite (EB) | $4.42 | $443.9 million (USD) | -75.7% | |
| Incannex Healthcare (IXHL) | $0.30 | $107.2 million (USD) | (data unavailable) | |
| Hyperscale Data (GPUS) | $0.21 | $99.5 million (USD) | -94.96% | |
| Image Protect (FAT) | $0.21 | $5.4 million (USD) | -97.2% |
The aim of investing in penny stocks is to “get in at the ground floor” and ride the escalator all the way to the top. Small investment, big reward—that’s the theory, and it’s one that can certainly play out in reality if you know what you’re doing.
For experienced investors who know how to research and pick stocks, penny stocks definitely have their place in a diversified portfolio. But if you’re a novice investor or you just aren’t willing to accept much risk, penny stocks may not be a good fit for you.
Penny stocks are often too small to be listed on the Toronto Stock Exchange or other major exchanges.
As a result, penny stocks are often traded over-the-counter (OTC) on OTC markets. These markets aren’t as strictly regulated as major exchanges and have fewer reporting requirements for companies.
In Canada, many small and micro-cap stocks are listed on the TSX Venture Exchange (TSXV) and the Canadian Securities Exchange (CSE). When you choose a trading platform, you’ll need to make sure it allows you to access all the stocks and markets you want to trade.
If you want to invest in Canadian penny stocks, here are some tips to help you get started:
This is important for all investments, but particularly higher-risk investments like penny stocks. Blue chip stocks are, by their nature, lower-risk options as they’ve got a long history of strong financial performance. You’ll need to check the financial statements of a penny stock, consider its growth potential, and find out more about its leadership team to help you decide if it could be a worthwhile investment.
Before you start buying, decide which penny stocks you’re going to invest in and how much you’re going to invest in each one. It’s also important to decide what price you’d sell at if the shares were to fall and stick to it to avoid the “I’ll just hold a little longer and see if the price jumps back up” mentality. The same applies for gains.
It can be easy to get emotionally attached to a penny stock, as they’re often the underdogs in your portfolio. So when their share price falls and falls some more, you can find yourself making excuses as to why you should keep holding. This is why it’s important to make a strategy, so you leave the emotions out of it.
Penny stocks may appear to be cheap in comparison to other shares listed on the TSX, but don’t base your investment decision purely on this. One factor that influences a company’s share price is the demand for its shares. The less demand from investors, the lower the share price. So some penny stocks may appear to be cheap, but you need to ask yourself why this is.
Stock screeners are useful tools that can help you choose which penny stocks to buy. You can filter stocks based on their price, then narrow the results further based on your trading strategy. Many online brokers offer screeners on their trading platforms, while there are also lots of free screeners available online.
Diversify your portfolio by investing in a range of penny stocks across different market sectors. This will reduce the risk of being over-exposed to the poor performance of a particular company or industry.
It’s also a good idea to ensure that penny stocks only make up a small percentage of your total portfolio. It’s commonly recommended that no more than 5% or 10% of your portfolio should be made up of penny stocks. And if you’ve got low risk tolerance, that figure will be even less.
Protect yourself against the volatility of penny stocks by using limit orders. This will help ensure that the rapid price change of a stock doesn’t lead to you overpaying for your investment. Stop-loss orders can also be useful to help minimize losses when trading penny stocks.
Even if you’re an experienced investor and you research all your stock picks carefully, penny stocks are risky. So while you might have some wins, it’s likely that you will also take some losses. It’s part and parcel of trading penny stocks, so be prepared for it.
If you want to invest in Canadian penny stocks, here’s what you need to do.
Compare brokers to find the best platform for investing in penny stocks. The platform you choose will need to support trading of OTC stocks, be easy to use, and have low or no trading commissions.
To make comparing even easier we came up with the Finder Score. Trading costs, account fees and features across 10+ stock trading platforms and apps are all weighted and scaled to produce a score out of 10. The higher the score, the better the platform—it's that simple.
It’s free to open an account online by completing an application. You’ll need to provide information like your name, date of birth, residential address and contact details, as well as your investing experience and the source of your funds. Proof of ID is also required.
Once your application has been approved, transfer funds over from your bank account so you’re ready to start trading.
Compare penny stocks in Canada to find companies you want to invest in. Use a stock screener to find penny stocks that suit your strategy, then research each company thoroughly to find out as much as you can about its financial health, growth potential and leadership team.
Log into your trading account and search for the stock you want to buy. You can place a market order to buy it at the best available price, or choose a limit order if you want to set a specific price (or better) at which you will buy the stock.
Enter the number of shares you want to buy or how much you want to spend. Then take a moment to verify that all details of the transaction are correct before placing your order.
Not sure whether penny stocks are right for you? Here are some alternative investment options to consider.
Penny stocks are speculative, risky and definitely not for everyone. But if you’re willing to accept a high level of risk, they offer the potential to discover hidden gems. Just make sure you understand the risks of penny stocks before buying, and that you research these small companies thoroughly before deciding where to invest your money.
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