How to Invest in Penny Stocks

Some stocks cost just a few centimes, luring investors who hope to make quick gains. This moneyland.ch guide explains what penny stocks are, and what to consider before investing in them. 

What are penny stocks?

In stock trading jargon, the term penny stocks is used to reference stocks with a very low price per share. The exact definition varies somewhat between countries. In the US, a penny stock is a stock that costs less than 5 US dollars per share. In the Eurozone and Switzerland, the thresholds are 1 Euro and 1 Swiss franc respectively.

A low share price is not the only criteria by which stocks are categorized as penny stocks. Stocks in this category often also share one or more of the following characteristics:

• Low market capitalization: Penny stocks often have a very small market capitalization, that can be as low as several million or even several hundred thousand francs.
• Low trade volumes: Penny stocks often have relatively low liquidity, and are often traded on smaller, less-known stock exchanges. Because of this, it is crucial to check the bid-ask spread before investing in this kind of stock.
• High volatility: The share prices of penny stocks are often subject to very sharp fluctuations.

The term penny stock originated in the United States. It is usually used in a derogatory way. It denotes unstable companies in financial difficulty whose low share price is caused by low market demand for the stock.

A low share price in itself does not necessarily mean that a stock is a poor investment. Stocks with a share price of just a few pounds are common in the British stock market, for example.

What makes penny stocks interesting for investors?

Many investors are attracted to penny stocks because of their potential to deliver high returns over very short periods of time. The combination of a low share price, low market capitalization, and low trade volume makes penny stocks much more prone to large price fluctuations. Enterprising investors take advantage of the fact that even small nominal increases in the share price can translate into large percentual gains.

Example: If a stock’s price were to increase from 20 centimes per share to 25 centimes per share within one trading day, that would translate into an impressive gain of 25 percent. If the amount of shares held by the investor is substantial, that seemingly insignificant nominal increase can result in large investment returns (see Table 1). The impact of a five-centime increase in the price of a high-valued stock would be much smaller, in terms of the percentual gain.

Table 1: Fictional example of potential returns on a penny stock investment

Are there any Swiss penny stocks?

The table below gives you an overview of Swiss penny stocks. Be aware that a penny stock can move into a different category very quickly. Because of that, it is possible that certain stocks included in the table below may no longer be penny stocks when you read this article.

Table 2: A selection of Swiss penny stocks

Sources: SIX Swiss Exchange, Tradingview.com. Stock prices as per: February 17, 2025. Market capitalization as per: February 19, 2025. For the sake of simplicity, stock prices are rounded to the nearest centime.

Can I invest in penny stocks using ETFs?

Currently, there are no exchange-traded funds (ETFs) that expressly focus on penny stocks (as per February 2025).

But there are ETFs that invest in micro caps. A micro cap is a company with a market capitalization below 300 million US dollars, though the exact thresholds are not clearly defined. The term micro caps denotes the smallest companies in terms of stock value – companies that do not have a large enough market capitalization to be considered small caps.

Many of the stocks that are classified as micro caps also qualify as penny stocks. But it is important to understand that a low market capitalization is not a sure sign that a stock is a penny stock. There are many micro caps that are financially healthy, and do not fall into the penny stock category.

Table 3: Overview of select micro cap ETFs

Source: Fund managers. Date: February 19, 2025.

You can buy and sell shares in ETFs using a stockbroker, just as you would with stocks. The interactive stockbroker comparison on moneyland.ch helps you find the cheapest stockbroker for your needs. Paying high stockbroker fees detracts from your investment returns.

What are the risks and disadvantages of penny stocks?

While the combination of a low share price and low market capitalization means that large returns are hypothetically possible, the high volatility can also result in high losses over short periods of time.

You should always bear in mind that penny stocks are generally a very risky investment, and often a speculative one as well. The high risk of loss is something you should always be aware of. It is important to only invest money that you could easily afford to lose if the investment were to go pear-shaped.

Other risks and problems to consider are:

• Total loss: Because penny stocks are often financially stricken companies, there is a very real chance that the company you invest in could go bankrupt. A bankruptcy could render your shares worthless.
• Fraud: The properties of penny stocks make them an attractive device for market manipulation, and particularly for pump-and-dump schemes. The fraudsters who run these schemes drive up the share price by propagating misleading positive information about the stock. As soon as demand from unwitting investors drives up the share price, the fraudsters quickly sell out and pocket the difference.

Always take the time to research the facts about the company you want to invest in before you buy any stock. Avoid getting lured by the prospect of quick returns. Stay calm and focused. The moneyland.ch guide to choosing a stock to invest in gives you useful tips for picking investments.

For long-term investors, a globally-diversified stock portfolio such as an ETF that replicates a global index is a better choice. Individual stocks, including penny stocks, can be used as additional components of a larger portfolio, such as a core-satellite portfolio.

How profitable are penny stocks?

Each penny stock is different, so it is impossible to make a blanket statement about their profitability as an investment. Both huge losses and high returns are possible, and that is true whether you invest over short terms or long terms. There is not way to predict future price developments.

Disclaimer: This article is provided for informational purposes only, and should not be considered as investment advice.

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