How risky are penny stocks?
"Penny stocks are only appealing to the brokers who sell the penny stocks and the companies selling ""penny stock signals!"". Generally penny stocks provide abysmal returns to the average investor (you or me). In ""The Missing Risk Premium"", Falkenstein does a quick overview on average returns to penny stock investors citing the following paper ""Do Investors Overpay for Stocks with Lottery-Like Payoffs? An Examination of the Returns on OTC Stocks"". Over the 2000 to 2009 time period, average investors lost nearly half their investment. A comparable investment in the S&P over this period would have been flat see here. There is a good table in the book/paper showing that the average annual return for stocks priced at either a penny or ten cents range from -10 percent (for medium volume) to -30% to -40% for low or high volume.  A different paper, ""Too Good to Ignore? A Primer on Listed Penny Stocks"" that cites the one above finds that listed, as opposed to OTC ""Pink Sheet"" penny stocks"", have better returns, but provide no premium for the additional risk and low liquidity.  The best advice here is that there is no ""quick win"" in penny stocks. These act more like lottery tickets and are not appropriate for the average investor. Stear clear!" Consider firstly that they're penny stocks for a reason - the company just isn't worth much. Yes, it could take off but this happenstance is rarer than you think. Next, there is the problem of how you'd find out what the good stocks to invest in are. Here in the UK, reliable news about stocks outside the FTSE indexes (AIM) is hard to come by. Also consider than there isn't the supply and demand for these stocks in the same way as there is in the main indexes. Even if you were to make a tidy profit over time, you might lose what you made in the delay selling the stock. Start-ups also have the problem of poor cash reserves so new employees are often given stock options in lieu of cash which further depresses the share price. I read a report once that said that only 1 in 10 penny shares yields a worthwhile return. I just don't like these odds so I tend to avoid. The biggest problem with penny stocks is that they are easily manipulated, and they frequently are.  Many of the companies trading as penny stocks have poor track histories of accurate financials, and what information that is available is not very reliable or verifiable. I recall a few years ago when there were articles out there in financial circles talking about how more than a few penny stocks were being manipulated by organized crime syndicates. Another big issue with penny stocks is liquidity.  Since they're so thinly traded (not a great deal of daily volume), anyone who puts enough money into a penny stock to make it worth the effort almost certainly becomes the biggest trader in the stock, which can make it tough to liquidate positions.  There are not enough market makers in the stock to be competitive, so you have to accept the bid/ask prices of whoever is willing to execute the trades, so the margins evaporate quickly. Penny stocks are something you can trade if you're bored, have money to burn, and just want to toy around with something just for the heck of it that you'll ultimately lose out on. Most penny stocks go to zero because most businesses fail.  You stated in your original post that you were wondering specifically about companies with no assets. These are exactly the kind that fail and go to zero.  There are many holes within the regulatory structure that allow for many accounting tricks in penny stock land. And even in areas that are adequately regulated, there will be few to no remedies for the optimistic penny stock shareholder speculator. Penny stocks are only appealing to two types of investors: Most of the beginners who invest in penny stocks only do so because they don't have a lot of money to invest in the marketplace while starting out, or they would otherwise like to avoid investing their savings into penny stocks. * If you are a beginning investor - do NOT invest in Penny Stocks * "Penny stocks are for the real gambler.  Don't even think about holding them long.  Buy a lot of shares and profit from a penny uptick.  Rake a hundred dollars here and there a few times a week if you can.  Don't fall in love with it.  Trade for profit.  Don't bet the farm.  Only play what you can afford to lose at the Great Casino in the sky (the stock market).  Sure, you will pick some losers, but you are not married to it, you don't have to keep it.  A couple of good winners will erase some loses.  Having lost thousands on the Blue Chips, and feeling I have wasted time waiting for an annual $100 gain on an ETF or mutual if I get lucky, has made me more risk tolerant for these ""BAD"" investments.  The ""GOOD"" investments should do so well."
How I understand it is: supply/demand affect price of stock   negatively/positively, respectively. Correct. Volume is the amount of buying/selling activity in these stocks (more   volume = more fluctuation, right?). Sort of.  Higher volume means higher liquidity.  That is, a stock that is traded more is easier to trade.  It doesn't necessarily mean more fluctuation and in the real world, it often means that these are well-understood stocks with a high amount of analyst coverage.  This tends towards these stocks not being as volatile as smaller stocks with less liquidity. Company revenue (and profit) will help an investor predict company   growth. That is one factor in a stock price.  There are certain stocks that you would buy without them making a profit because their future revenue looks potentially explosive.  However, these stocks are very risky and are bubble-prone. If you're starting out in the share market, it's generally a good idea to invest in index funds (I am not a broker, my advice should not be taken as financial advice).  These funds aggregate risk by holding a lot of different companies.  Also, statistics have shown that over time, buying and holding index funds long term tends to dramatically outperform other investment strategies, particularly for people with low amounts of capital. "If this money is intended to be used for retirement and depending on how old ""older"" is, it sounds a little risky to be putting too much money in a stock based mutual fund.  While the CDs may seem like crappy investments right now, it is important to down-shift risk as you get closer to retirement because this person won't have as much time to recover if the markets take another big dip." I will just explain the time value of money in general, descriptive terms and save the math for someone else. Imagine: You have half a million dollars. I'd like to borrow it all from you. I'll pay it all back, every penny, but no more. And I'll pay it back in about, oh, thirty years or so. (Imagine also that you can be 100% sure that I'll pay it back.) Does this sound like a good deal? Not really. Why not? Well, you could do something with that sort of money. With that sort of money, you could do a lot of things for 30 years. You could buy a nice house and live in it for 30 years and save yourself from spending a lot of money on rent during that time (or save money on interest by paying off a mortgage early) even if the price of the house goes nowhere. If you already had a house, you could do some home improvement, like insulate the place better (to save on heating bills) or even just on something that you're going to enjoy for part of those 30 years (a patio in the back yard). If you were feeling entrepreneurial, you could take that money and start a business. Or you could invest that money in the stock market, and get a lot more back.... and if that's too risky for you, just start a savings account and earn interest. And finally, in 30 years, the value of the dollar will be lower because of inflation, so it won't buy as much now as it will then. That's the time value of money. It's the opportunity cost of the best of the things that you could have done with that money during the time it was gone. When you take out a loan, your interest payments will depend in part on the time value of the money you're borrowing: the people making the loan could be investing that money somewhere else, like government bonds. (It will also depend on factors like the risk of default on the loan - this is why credit card debt is more expensive than debt like a mortgage that's backed by a big fat asset like a house which can be seized and sold if you happen to default.) This is how the Federal Reserve can affect interest rates across the economy by just buying or selling government bonds. I am voting you up because this is a legitimate question with a correct possible answer. Yes, you shouldn't buy penny stocks, yes you shouldn't speculate, yes people will be jealous that you have money to burn. Your question: how to maximize expected return. There are several definitions of return and the correct one will determine the correct answer. For your situation, $1,000 sounds like disposable income and that you have the human capital to make more income in the future with your productive years. So we will not assume you want to take this money and reinvest the remains until you are dead. This rules out #2. It sounds like you are the sole beneficiary of this fund and that your value proposition is regardless of asset class and competition to other investment opportunities. In other words, you are committed to blowing this $1,000 and would not consider instead putting the money towards paying down credit card debt or other valuable uses. This rules out #3. You are left with #1, expected value. Now there is already evidence that penny stocks are a losing proposition. In fact, some people have been successful in setting up honeypot email accounts and waiting for penny stock spam... then shorting those stocks. So to maximize expected return, invest 0% of your bankroll. But that's boring, let's ignore it. As you have correctly identified, the transaction costs are significant, $14 in tolls on crossing the bridge both ways on a $1,000 investment already exceeds the 5-year US bond rate. Diversification will affect the correlation and overall risk (Kelly Criterion) of your portfolio -- but it has no effect on your expected return.  In summary, diversification has zero effect on your expected return and is not justified by the cost. At one point it was illegal to melt silver coins in the US, but it is legal now.  I don't know that will happen with copper coins, but that's what happened with silver coins. Accumulating nickels and leaving them as-is (in their spendable state) is legal.  It's also a way to take physical ownership of copper. I expect to see more sales of nickels based on weight.  People are already selling high-copper-content cents on eBay, by weight.  There are machines in production that sort the zinc ones from the copper ones.  Gresham's Law has small business backing. ;) Copper cents are already worth twice their face value in the copper content.  Nickels will get up there, too. They are awfully heavy and bulky relative to their value, though.  Precious metals give you better bang for your ounce. "You are your own worst enemy when it comes to investing. You might think that you can handle a lot of risk but when the market plummets you don't know exactly how you'll react. Many people panic and sell at the worst possible time, and that kills their returns. Will that be you? It's impossible to tell until it happens. Don't just invest in stocks. Put some of your money in bonds. For example TIPS, which are inflation adjusted treasury bonds (very safe, and the return is tied to the rate of inflation).  That way, when the stock market falls, you'll have a back-stop and you'll be less likely to sell at the wrong time. A 50/50 stock/bond mix is probably reasonable. Some recommend your age in bonds, which for you means 20% or so. Personally I think 50/50 is better even at your young age. Invest in broad market indexes, such as the S&P 500. Steer clear of individual stocks except for maybe 5-10% of your total. Individual stocks carry the risk of going out of business, such as Enron. Follow Warren Buffet's two rules of investing:  a) Don't lose money b) See rule a). Ignore the ""investment porn"" that is all around you in the form of TV shows and ads. Don't chase hot companies, sectors or countries.  Try to estimate what you'll need for retirement (if that's what your investing for) and don't take more risk than you need to. Try to maintain a very simple portfolio that you'll be able to sleep well with. For example, check into the coffeehouse investor  Pay a visit to the Bogleheads Forum - you can ask for advice there and the advice will be excellent. Avoid investments with high fees. Get advice from a good fee-only investment advisor if needed. Don't forget to enjoy some of your money now as well. You might not make it to retirement. Read, read, read about investing and retirement. There are many excellent books out there, many of which you can pick up used (cheap) through amazon.com." Are you willing to risk the possibility of investing to prepare for these things and losing money or simply getting meager returns if those crises don't happen? Just invest in a well diversified portfolio both geographically and across multiple sectors and you should be fine. A cautionary tale:  About 25 years ago I decided that I should try my hand at investing in some technology companies.   I was in the computer biz but decided that I might suffer from myopia there, so I researched some medical startups.  And I did some reasonably good research, given the available resources (the Internet was quite primitive).  I narrowed things down to 4-5 companies, studying their technology plans, then researched their business plans and their personnel. In the end I picked a drug company.  Not only did it have a promising business plan, but it had as it's CEO a hotshot from some other company, and the BOD was populated buy big names from tech companies and the like.  AND the company had like $2 of cash for every $1 of outstanding share value, following their recent IPO. So I sold a bit of stock I had in my employer and bought like $3000 worth of this company. Then, taking the advice I'd seen several places, I forgot about it for about 6 months. When I went back to look their stock value had dropped a little, and the cash reserves were down about 20%.  I wasn't too worried.  6 months later the cash was down 50%.  Worrying a little.  After I'd had the stock for about 2 years the stock price was about 10% of what I'd paid.  Hardly worth selling, so I hung on for awhile longer. The company was eventually sold to some other company and I got maybe $50 in stock in the new company.