Investing in penny stocks requires significant conviction. Many of the companies in this group are purely “story stocks.” That means they’re not profitable; many don’t even have any revenue. Investors don't evaluate these companies using metrics such as price-to-earnings ratios or free cash flow. Instead, they have conviction in the story behind the stock.
At its worst, it can create conditions similar to those in the meme stock frenzy of 2020 and 2021. Many stocks debuted with nothing but a story and got sent to unsustainable prices, only to crash back down when reality set in. Many of those companies are back to trading as penny stocks, and investors are wisely evaluating them with more scrutiny.
