In this article, we cover 10 Must-Buy Penny Stocks to Invest In.

According to the LSEG 2025 Mid-Year Outlook, small-cap earnings are projected to grow 40.8% in 2025, compared to 8.8% for the S&P 500. The report attributes this divergence to smaller firms’ lower reliance on international revenue (32% vs. 38% for large caps), greater flexibility in adapting to tariffs and supply chain disruptions, and stronger ties to domestic demand and policy support.

Within the small-cap space, many of the most overlooked opportunities lie in penny stocks (companies trading under $5 per share). According to FTSE Russell, the average market cap in the Russell 2000 is around $1 billion, but many constituents fall into the penny stock category. Erik Norland, Chief Economist at CME Group, argues that conditions are favorable for small caps to outperform, noting that the S&P 500 trades at five times book value compared to just two times for the Russell 2000. “So it could be that small-cap stocks are undervalued and getting ready for a rebound,” he said.

Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, recently pointed out that while the “Mag 7” tech giants delivered 26% earnings growth in Q2 2025, the remaining 493 S&P 500 companies managed just 1%. She cautioned that large caps face risks from margin compression and stagflation, while urging investors to rotate into quality small caps with pricing power and domestic exposure. Her team recommends steering clear of unprofitable tech but selectively adding smaller companies with solid fundamentals.

Against this backdrop, we turn our focus to 10 penny stocks whose year-to-date performance indicates they are positioned for significant upside.

Our Methodology

To identify the 10 Must-Buy Penny Stocks to Invest In, we screened for companies trading under $5 per share with strong year-to-date (YTD) returns as of August 31, 2025. We also assessed institutional sentiment using hedge fund holdings data from Insider Monkey’s Q2 2025 database of 13F filings. The final list highlights the 10 penny stocks that combine notable recent performance with hedge fund interest. For clarity and consistency, the stocks are ranked in ascending order based on YTD returns.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

Must-Buy Penny Stocks to Invest In

10. Lightwave Logic Inc. (NASDAQ:LWLG)

Year-To-Date Returns: 55.56%

Share Price: $3.36

Number of Hedge Fund Holders: 17

Lightwave Logic Inc. (NASDAQ:LWLG) is one of the must-buy penny stocks to invest in. On August 20, the company appointed Dr. Sundar Ramamurthy to its Technical Advisory Board. With 30+ years in materials science and semiconductors, he brings deep expertise from leading roles at Applied Materials and a strong record in product commercialization and global partnerships.

“We are very excited to welcome Sundar… his expertise in materials science and commercialization is highly relevant,” said CEO Yves LeMaitre. Dr. Ramamurthy added, “It is a privilege to join Lightwave Logic at such an exciting time. EO polymers are gaining relevance in enabling higher data transmission speeds while meeting power constraints.” He will support the company’s push toward broader adoption of its polymer platform.

Lightwave Logic Inc. (NASDAQ:LWLG) is a U.S. tech firm developing electro-optic polymers for ultra-fast, energy-efficient data transmission. Its platform supports next-gen photonic devices in telecom, data centers, and AI, with a focus on scaling for global impact.

9. Lloyds Banking Group PLC (NYSE:LYG)

Year-To-Date Returns: 60.00%

Share Price: $4.32

Number of Hedge Fund Holders: 13

Lloyds Banking Group PLC (NYSE:LYG) is one of the must-buy penny stocks to invest in. On August 19, the company announced that it will begin allowing its customers to deposit cash at over 30,000 PayPoint locations across the UK. The service is scheduled to begin operation on August 26, 2025. Customers will use the Lloyds mobile app to generate a barcode for cash deposit, usable at PayPoint locations such as convenience stores, newsagents, and supermarkets.

Customers can deposit up to £300 per day in cash, with a monthly limit of £600. The deposited funds are expected to appear in their accounts within minutes. The Lloyds-PayPoint partnership is intended to provide more convenience and access for customers. This partnership makes Lloyds Banking Group the first high street bank to utilize PayPoint’s BankLocal service.

This new service follows Lloyds’ announcement of plans to close an additional 55 bank branches, bringing the total number of planned closures to almost 300 by 2026. This is part of a broader corporate restructuring to reduce costs and encourage the use of digital banking.

Lloyds Banking Group PLC (NYSE:LYG) is a financial services company. It provides retail and commercial banking, insurance, and wealth management services primarily in the United Kingdom. The company operates well-known brands, including Lloyds Bank, Halifax, and Bank of Scotland, serving millions of customers through a nationwide branch network and digital banking platforms.