Gen Z investors gravitate toward penny stocks for a cheap way to start building wealth, says S&P Global

• Gen Z investors are driving interest in penny stocks, S&P Global Market Intelligence said in a report this week.
• Penny stocks are cheap to buy for young traders who have less money to invest than their older counterparts do.
• Gen Z investors also use fractional investing to buy large-cap shares such as Tesla.

Gen Z traders tend to have less money than their older counterparts do, and inexpensive stocks serve as their main avenue into investing, according to an S&P Global Market Intelligence report.

Their penchant for penny stocks, interest in how markets work, and relative lack of capital for investing are some of the "unique characteristics" of Gen Z investors, S&P Global said in its US Digital Investing report published this week.

"The challenges confronting young investors could explain why penny stocks were the most heavily traded equities on major U.S. exchanges in nine of the first 11 months of 2021," Tom Mason, senior research analyst at S&P Global Market Intelligence, wrote in the report. "With penny stocks, one can buy a relatively large block of shares on the cheap."

Cannabis producer Sundial Growers (which traded around $0.56 a share on Thursday), workflow automation company Exela Technologies ($0.57) and oil producer Camber Energy ($0.44) were among the most heavily traded stocks last year. AMC Entertainment followed top-volume stock Sundial, even though the movie theater chain's shares trade above $15.

The Gen Z stocks tended to have low percentages of institutional ownership, S&P Global noted. AMC was the highest at about 30%, well below the 60% average for all US stocks traded on major exchanges.

They also have disclosure and listing issues. Camber Energy recently won an extension from the New York Stock Exchange to file certain financial reports. And Sundial is working to avoid a potential delisting from Nasdaq as the bid price on common shares had fallen below $1 for 30 consecutive days.

But Gen Z was undeterred. And to illustrate the new driving force in penny stocks, S&P pointed out that in the third quarter of 2021 Gen Z was the only cohort to have Camber Energy in its top 20 holdings. The findings were based on an analysis of more than 6 million accounts by Apex Clearing, a provider of back-end services for retail trading apps.

Despite their interest in penny stocks, young investors aren't shutting out large-cap names from their portfolios. Tesla, Apple and Amazon are among their holdings, aided in part by retail trading apps offering fractional investing, a feature that lets investors buy a portion of high-priced stocks.

"It seems, then, that some retail traders simply like penny stock trading, perhaps as a long-term, moon shot investment or as a way of making bets on short-term price movements," wrote Mason.