Highlights

• Penny stocks are generally those stocks that are trading below £1 with a market capitalization of less than £100 million. Whereas, FTSE 100 Index consists of 100 companies listed on the London stock Exchange with the highest market capitalization and are generally highly priced.
• You may also consider owning a diverse portfolio of both penny stocks and FTSE 100 stocks.

While starting to invest in 2022, you might be thinking how to expand your portfolio in this volatile market. Last year, the FTSE 100 ended on a better note than from where it had started. On 4 January 2021, which was the first trading day for the year, the FTSE 100 closed at 6873. On 31 December 2021, the last day of trading, the FTSE 100 was at 7,376 around 12.00 PM. In this year, the main market index has risen over 7% since the first day. Despite an average year, the FTSE 100 showed signs of recovery.

Now while starting to invest this year, most investors are thinking whether to go for penny stocks or FTSE 100 Stocks. Both have advantages and disadvantages, and in-depth study of the market is utmost important. Investing in penny stocks are generally riskier than investing in blue-chip stocks, but they can give larger returns than well-established companies with attractive business prospects.

Penny stocks are generally those stocks that are trading below £1 with a market capitalization of less than £100 million. Whereas, FTSE 100 Index consists of 100 companies listed on the London Stock Exchange with the highest market capitalization and are generally highly priced. These stocks tend to have a stable financial record and credibility and can endure any adverse market situation and make high profit in good market situations.

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However, penny stocks have always attracted investors because they are traded at minimal pricing and can produce larger returns in long-term, but these companies may struggle to find funding to keep the keep working in economic crisis.

Also read: 5 penny stocks that can be good bets for 2022 

Now let’s look at which one you should choose in 2022 and why. 

Long-term Return

Penny stocks trade in lowest prices and such companies have great potential and scope for growth which may deliver higher return than the FTSE 100 stocks. If you have limited capital, you can purchase a substantial number of shares, but the average penny stocks offer a poor long-term return as it’s not easy to create a successful business. Due to its low trading volume, these stocks can be easily manipulated than most stocks, which result in high price volatility, and these are easy to set up that’s the reason investment frauds are more common with penny stocks.  

Whereas FTSE 100 stocks have a strong financial position and business prospects, which make them safer in any market situation and volatility. These businesses also offer attractive combination of moderate price to earnings ratio, promising growth prospects and rising dividend yields.  

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Risk Associated

As penny stocks are generally issued by unknown or growing companies or start-ups there is less or no information available about the company’s financial position and history. So, there are high changes that investors invest in companies that have no future prospects, which may lead to losses.

Before investing in these stocks, it’s important to do your own research about the company’s fundamentals and beware of scams, such as pump and dump. Further, these companies may struggle to find funding to keep the keep working in economic crisis.

While FTSE 100 stocks have stable financial performance and have limited risk associated. Investors may mitigate risk associated with FTSE 100 shares by diversifying their investment portfolio. For FTSE 100 companies, it would be easier to raise money in period of economic uncertainty and are less likely to run into terminal issues. 

Also Read: FTSE 100 offsets Monday's loss as Wall Street bounces back 

Liquidity and Volatility

As penny stocks are less known by investors, it can become challenging for investors to find the buyers for stocks and in economic crisis it may become more difficult to find out the potential buyers. Whereas FTSE 100 stocks enjoy market goodwill and high creditworthiness, which make them an attractive investment option with high volume and liquidity.

As penny stocks are traded in small volume among a handful of investors, prices of these stocks may shoot up very quickly and may also drop faster, making it not a good choose for long-term and for anyone with low risk tolerance. Manipulating the prices of FTSE 100 stocks are not easy as these stocks are traded in high volume among various investors.  FTSE 100 stocks are quite stable with a robust financial position, which make it unsuitable for making profits through day-to-day trading.  

Dividend Payouts

Penny stocks rarely pay dividends; on the other hand FTSE 100 stocks provide routine returns in the form of dividends regardless of the market condition, to their shareholders as a result of their efficient dividend policy.

Also read: 5 FTSE stocks that gave over 100% return in 2021

Bottomline

Penny stocks can prove to be a great investment and may provide returns, multiple times of the initial investment price, if invested with proper research into the fundamentals of the company. However, if investors are risk evitable and looking for stocks to put money for long-term, FTSE 100 stocks can be a good option. Before investing in any stocks investors set their financial goals, risk appetite and income and you may also consider owning a diverse portfolio of both penny stocks and FTSE 100 stocks.