When you first start your investing career you hear over and over how “risky” penny stocks are and that they are “scams” and that you should “stay away”. Bullshit those guys are feeding you blue pills. Quit listening to them and listen here on how investing in small/micro caps is not only less risky than investing in large-cap stocks but more profitable and exciting.

First, a boomer value investor may tell you diversification is for losers (Charlie Munger I’m talking to you) however if you’re investing in penny stocks, you can significantly diversify your portfolio and reduce your risk. When you are investing in large-cap stocks, you are putting your money into a limited number of companies and sectors, exposing yourself to unsystematic risk. I have fallen victim to this - a few big bets on tech-related large caps that were deemed “safe” and “fairly valued”. Whereas with penny stocks, you can spread your investment across many different industries and companies to expose yourself to more opportunities and hedge against risk. Let’s say you have 100 dollars and you spread this between 10 companies – you only need 1 winner to make a profit. It is common for penny stocks to go 10x-20x.  For example, 1 year ago today you picked a portfolio of 10 stocks, and $PMET.V was included - even if you screwed up and you lost 100% on 9 of those picks, PMET.V would have still given your whole portfolio a 360% return on the year despite picking 9 dud companies. This is a rare case, but if you can learn to scower and diversify to hedge against risk – you can also see returns like this. There are tons of rules to diversify safely. I will keep it simple. Find REAL companies, with good structures, and trading heavily discounted to their asset value or near 0. Limit your downside & search for maximum upside potential.

‍

‍
Second, less competition: The larger a company is, the more competition there is to buy its stock. This means that the price of a large-cap stock may be artificially inflated, making it less attractive. With penny stocks, there is often less competition. Most of these penny stocks are innovative growth companies – looking for the next gold mine, inventing a new drug, or maybe AI technology so while they are doing so, the valuations of these companies are reasonable, leaving a fortune of money to be made after their discovery.

Third, 10 baggers: We all love 10x returns – it’s probably why you are reading this right now. Penny stocks are often associated with high risk, but they are outweighed by high returns. Because these penny stocks are neglected by big money, they can be undervalued, allowing us to accumulate chunks at dirt cheap and reap the benefits on the way up.
Lastly, lower market capitalization: Penny stocks have tiny market caps, which means that even a small increase in their value can result in a substantial increase in their stock price. Especially if you can hunt a stock with a tight structure or small free float (will touch on this in another article). On the other hand, large-cap stocks have a higher market capitalization and require large sums of money to result in a meaningful change in stock price. You could wait all year for $META to do 20% meanwhile penny stocks have the potential to do 200% in a day.

‍

In conclusion, investing in penny stocks can be less risky than investing in large-cap stocks. By diversifying your portfolio and taking advantage of the lower competition and potential for 10x returns, you can reduce your risk and reap the rewards. There are still TONS of scams, so do your research and invest in reputable companies. However, it is important to remember that investing in ANY stock is risky – and yes penny stocks are the riskiest but with good research (real company, good share structure) you can make a fortune in this shunned sector. 

‍