4 Types of Stocks To Avoid

Since 1957, the S&P 500 has seen an average annual return of over 10.5%, according to Official Data. Someone who invested $100 at the start would have around $97,000 in August 2025 (a figure that doesn’t account for the erosion of the dollar over time).

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If you’re looking to build wealth over the long term, stocks might be worth the investment. However, there are certain types of stocks you might be better off avoiding.

There are plenty of publicly-traded companies out there. From tech to pharmaceuticals, deciding which one — or ones — to invest in can be tough. But as a general rule, never invest in anything you don’t understand.

“You need to take the time to understand what you are buying, how it impacts your financial plan and the inherent risks,” said Jay Zigmont, PhD, certified financial planner (CFP®) and founder of Childfree Trust.

If you’re just starting out, Zigmont suggested checking out the book “The Simple Path to Wealth” by J. L. Collins. This “is the best book to start with and may be the only book you need to understand investing,” he said.

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As defined by Investopedia, meme stocks are shares of companies that have gained popularity through social media and promote or build a specific narrative across online communities. These stocks are especially popular amongst newer or inexperienced retail investors.

Perhaps the most famous example of a meme stock is GameStop (GME). Back in 2020, a YouTuber by the name of Roaring Kitty shared a detailed analysis with his community of how this specific stock — which he was bullish on at the time — could jump from around $5 to $50.

During a period of frenzied buying and holding, GME share prices rose to almost $500 apiece in January 2021. Prices steadily fell after that until they reached around $10 per share in 2024.

While some meme stocks have the potential for great gains, they’re also highly volatile. They’re at the whims of influencers and online communities. Because of this, they can be subject to rapid gains and losses, which makes them highly risky.

Investors have been trying to choose the “right” stock and time the market for years, often with minimal to no success. If you want to minimize risk, avoid individual stocks.

“I tell everyone to avoid buying single stocks. You are effectively making a bet on one company, or even a couple of companies, and it is no different than putting your money on the roulette wheel in Vegas,” said Zigmont. “Picking individual stocks implies you know something that the market does not. I have a PhD, MBA, and I’m a CFP® professional, and I don’t try to outsmart the market.”

Instead of trying to outsmart the market, consider index funds or exchange-traded funds (ETFs).

“For my clients and my own investments, we invest in three ETFs,” Zigmont said. “The first one is the entire U.S. stock market. The second is the world stock market. The third is in bonds. In this way, you are buying the entire market and riding the market’s ups and downs.”

A penny stock is any company share that, according to the U.S. Securities and Exchange Commission, trades at under $5. You can buy them on platforms like Robinhood.

The benefit of penny stocks is that there’s a relatively low barrier of entry — after all, they’re inexpensive at an individual level. The downside is that demand can be low, making them harder to sell. Not all brokers are reputable and scams abound in the industry, so only invest with great caution.

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