Motley Fool CEO: These Investors Should Never Invest in Penny Stocks

Sometimes, what looks a good deal isn't great at all

For instance, buying cheap stocks seems smart, particularly if you're new to the game and don't have a lot of cash

The temptation is real to buy several dozen (or hundred) s of low-cost penny stocks

If you don't believe me, go back and watch "The Wolf of Wall Street," and remember that Leonardo DiCaprio's performance is based on a true story

But Motley Fool Chief Executive Officer Tom Gardner says that's the wrong way to start

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What did Tom Gardner say penny stocks

Gardner founded The Motley Fool with his brother, David Gardner, and Erik Rydholm to educate individual investors and help them make good decisions their money

Here's what he said penny stocks: No one should make a purchase in the public of a stock priced below $10 a as their first investment or first collection of investments

There are companies that can perform very well with a low price, but in general, that is an indicator of a failing

That is simultaneously attractive to new investors because they think I can get so many s

The total number of s don't matter

They generally fall into one of two buckets: A long shot

These typically are companies that are years away from ever getting a penny of revenue and are surviving only by raising huge amounts of capital to fund re

Think of early-stage bio companies that are in the discovery and pre-clinical phase of re

Even after they get a drug candidate, they have to go through three phases of clinical trials -- again, a very costly cess -- before they can think getting regulatory apval and eventually getting to market

Thus, the stock price is incredibly low because there's no fit to be had for a long time -- and even then, everything has to go right

This is what you call a company that is in absolute free fall for various reasons

As the saying goes, you don't want to catch a falling knife

Sometimes, these companies are failing, and the stock falls to penny stock because they've simply been beaten by competitors who are doing a better job and capturing the market

Sometimes, there are regulatory issues, or the stock is being heavily sold short by investor hoping to fit from a declining price

You see this most often in some retail companies, smaller banks, and some cryptocurrencies and companies affiliated with cryptos

JetBlue Airways stock is an example of this right now

If you're just starting out, penny stocks aren't worth the risk In general, newer investors should remember that there's always a reason a penny stock is so cheap

If there was value in the company, more experienced investors would have found it. "If I could say to the entire world, when you enter the public, you are not allowed to buy any stocks in the first three years that are priced below $10 a, we're going to literally hundreds and hundreds of millions of dollars across the investment landscape for newer investors," Gardner said in the interview

By sticking to that strategy, first-time investors can start their journey on the right foot and can lay a foundation to meet their financial goals

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors

Patrick Sanders has no position in any of the stocks mentioned

The Motley Fool has positions in and recommends Berkshire Hathaway and Meta Platforms

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