MW Trading in risky penny stocks is booming. Why it could be a sign of trouble ahead for the market.

By Joseph Adinolfi

A recent report by Goldman Sachs showed activity in shares priced at $1 or less hit a record on June 12 as a percentage of total U.S. market activity

Trading in penny stocks has exploded over the past few years, driven in part by individual investors' ever-expanding appetite for risky bets, as well as a few tantalizing wins.

But amid the frenzied activity, some see signs of trouble ahead for the broader market.

Recently, activity in the penny-stock space hit a new milestone, according to a report from Goldman Sachs Group. Equity strategists at the bank found that trading in shares worth less than $1 accounted for more than 47% of total volume across the U.S. equity market on June 12, the highest share of daily trading on record. Overall, daily volume in these names has roughly tripled since 2021, the Goldman team said.

Penny stocks are shares of extremely speculative companies often with tiny market capitalizations. Some define a penny stock as any share trading at less than $1 apiece, although definitions vary. Some consider any share worth $5 or less to be a penny stock, according to a primer from Fidelity that was published in June. Others use the phrase as a byword for companies that aren't listed on major exchanges, and thus trade over the counter.

When speculative stocks with no or little earnings start to outperform shares of companies with established track records of profitability, it could mean that the market is getting dangerously frothy, said Gene Goldman, chief investment officer for Cetera Investment Management.

"It's a sign of a market top when investors are buying first and asking questions later," Goldman told MarketWatch during an interview last week.

As stocks have clawed their way back from the tariff-induced tumult of early April, high-risk names have done particularly well. Of the 14 stocks in the Russell 3000 RUA that have rallied by 200% or more since the S&P 500's April 8 closing low, 10 had no reported earnings, according to Bespoke Investment Group.

'You're not going to 10x a blue chip overnight'

Penny stocks have gotten a bad rap over the years, fueled in part by the pump-and-dump schemes depicted in the film "The Wolf of Wall Street."

Regulators including the Securities and Exchange Commission and the Financial Industry Regulatory Authority have advised that investors interested in these names should tread carefully. Finra warned in 2024 that thinly-traded microcap stocks are vulnerable to manipulation.

But those notices haven't dissuaded individual investors from trying to cash in on the next big winner. To many, the prospect of a sizable payout is worth the risk.

"You're not going to 10x a blue chip overnight, but with a low-float penny stock, a press release or a big-volume day can turn a $500 play into $5,000 if you time it right," said Wes Harner, an individual investor who answered questions from MarketWatch via chat.

Harner shared screenshots from a Robinhood account that reflected ownership of 100,000 shares of Healthcare Triangle Inc. (HCTI). Shares of the company, which focuses on the digitization of healthcare records, were up more than 20% at one point Monday. But they could still be bought for less than 3 cents apiece.

'FOMO' in the driver's seat

An occasional contributor to popular subreddits like "r/pennystocks," Harner said many investors interested in penny stocks appear to be motivated by "FOMO," or the fear of missing out.

Recently, a few big winners have minted massive windfalls for investors who were in the right place at the right time, drawing more attention to the space.

Some of the quantum-computing stocks that made waves late last year when they broke out into a dizzying rally had traded at around $1 a share as recently as September. That includes Rigetti Computing Inc. (RGTI) and D-Wave Quantum Inc. (QBTS).

Shares of an obscure Hong Kong-based company called Regencell Bioscience Holdings Ltd. $(RGC)$ suddenly took off earlier this year, ultimately peaking at more than $83 intraday on June 16, a year-to-date gain of roughly 64,000%, according to Dow Jones Market Data. The stock had started 2025 trading at roughly 12 cents.

But investors could just as easily stumble into an investment fraud. Last year, the Justice Department charged two individuals in a pump-and-dump scheme related to Minerco Inc., a penny-stock company that purported to be the "first publicly traded company focused on the research, production and distribution of psilocybin mushrooms."

The scheme had saddled investors with millions of dollars in losses, and involved using false or misleading information to inflate the company's share price.

Some Wall Street professionals said they first noticed the boom in penny stocks due to its impact on daily trading volume figures for the broader market.

"While the overall value of what has traded in the market over the past couple of weeks is diminishing, volume has stayed elevated - but that is just because the penny-stock names have been trading in much higher volumes," said Farzin Azarm, a managing director at Mizuho Securities USA.

Joseph Saluzzi of Themis Trading said activity in penny stocks starts to pick up early in the day, well before Wall Street opens for business. Goldman said that roughly half of average daily trading volume in these names occurs before 11 a.m. Eastern.

"I think they get their start overseas and then when exchange trading starts at 4 a.m., they get moving here," Saluzzi told MarketWatch via email. "Probably some influential trading chat rooms getting the early word out."

On any given day, it seems like many of the top 10 most active stocks in the U.S. are shares of companies trading at less than $1 a share, Saluzzi said.

U.S. stocks continued to climb on Monday, with the S&P 500 SPX and Nasdaq Composite COMP tallying another round of record closing highs.

-Joseph Adinolfi

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June 30, 2025 16:03 ET (20:03 GMT)

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