For stock investors the question is answered quickly. Neither Forex, nor penny stocks! The reason most of them would put at the number one spot is risk. In Forex it is the huge margin that kills the trader and in the penny markets it is the fraud.
In the stock world investors would argue everything is fine. They are right, mostly. There is just one tiny drop of acid. Their trading style, which they call investing, is wrong.
A stock that goes terribly down in price tells you something. Of course, it wants to tell you that you shouldn’t buy it. There is a reason for the ongoing price drop. In the same manner that uptrends are a signal to buy, downtrends are a signal to sell.
In a nutshell, risk averse investors incur often the highest possible risk, the risk of a substantial loss, the total loss. Adding to that, they are not aware of their risk, and that makes this risk especially risky.
What exactly are the risks in Forex vs the penny stock markets? The important or better question is here, if there is a risk, can it be mitigated?
For Forex the sad answer is that it is money machine of the negative sort. It constantly sucks the spread out of you. The bigger players have a better trading environment. For instance, they can front run customers, legally, which will make them effortlessly a gain. This customer, but also you on average, has to pay slippage to the intermediate dealer chain and the manipulation of the large players. There is hardly a way around it.
The other risk in Forex is overtrading. The math is playing against you, even if you overtrade only moderately. Generally this could be avoided by putting on positions matching about the size of the own trading capital. But without the leverage Forex is boring and stocks are more interesting.
Penny stocks are much more manipulated than Forex and their price fluctuates wildly at times. The latter is absolutely no problem. Ask yourself, why are you speculating. Do want the price to move or do you want it to be stable?
Interestingly the manipulation is also no problem. Imagine a penny stock chart. The price goes up and down, or vice versa. It doesn’t matter whether it got manipulated or not! But there is one caveat. You will have to use the right trading system.
The right or the best trading system for penny stocks is directly deducible from the existence of market manipulation in the small cap markets. Pump and dump exists and that means, buy only if the price of a penny stock is cheap compared to its own price history.
The simple buying signal for penny stocks would be then that recently some new market activity has set in. For such chances in the small cap market the odds are surely not worse than for the large scale investor who likes to catch falling knives.