Why penny stocks are tempting
With all these dangers, some investors still buy penny stocks. They like that the stocks have a low share price, letting them buy large numbers of shares. And they dream that their stock will hit it big and give them a huge profit.
The latter may sound nice, but an overwhelming majority of penny stocks fail. As for the former, you no longer need to have a lot of money to buy into great companies with high stock prices — you can do so by buying fractional shares.
The fractional share alternative
Beginning in the spring of 2020, major brokerage houses like Schwab and Fidelity started allowing their customers to buy fractional shares of a company. How does that work? Let’s say you have $1,000 to invest. You’ve wanted to buy shares of Amazon.com for a long time, but it’s just too darn expensive at $3,250 a share.
With fractional shares, your broker can take that $5,000 (that you were going to invest in penny stocks) and buy about 1.5 shares of Amazon. That doesn’t seem like much, but look at it this way: If the stock increases by 10%, you’ll still have the same return, whether you own 1,000 shares of a penny stock or 1.5 shares of Amazon. But which company do you think has a better chance of achieving that type of return — a totally unproven and unknown company or the online e-commerce leader that’s still growing by gangbusters?