Loading the player...
A:

No, you are not required to invest only in penny stocks - investors are generally not restricted to a certain kind of stock based on the amount of money they have. That is, a $500 investment is a $500 investment no matter how many shares you purchase or how high the share price. For example, if you invest in a company that is trading at $0.10, you can buy 5,000 shares, but you can also invest in a company trading at $100 and buy only five shares. Although there are fewer shares in the second case, the total value of the investment is the same.

But, regardless of how much money you have available to invest, it is very important to understand that penny stocks are generally of highest-risk stocks in the market. They may seem attractive since a rise from $0.10 to $0.15 represents a 50% increase, but penny stocks have also a high chance of generating large losses. As such, especially if you are a new investor, you might instead want to consider, for instance, blue-chip companies - such as General Electric or Microsoft - which tend to have long-established track records of operations and trade on exchanges that are closely regulated by the SEC. These characteristics are not found where penny stocks are traded - in the over-the-counter markets. That said, however, remember investing in stocks involves some level of risk, even if you invest in big players.

If you want to invest in stocks with relatively little money, it is especially important that you take into account trading commissions and the minimum-deposit requirements imposed by some brokerage accounts. (Before investing in the stock market, you might find that it is better to put the $500 into something with less fees and restrictions, such as a savings account, until you can save up more to invest in stocks.) Consider using an online discount broker, which tends to have the lowest fees (under $10 per trade).

But even though you use a discount broker, remember commission fees act as negative returns, so do try to minimize them as much as possible. For example, if the commission is $10 per trade, after making one trade with your $500, you have only $490 to invest - in other words, you have already lost 2% on your investment. This means that to break even, your stock will need to go up by roughly 2%. (Some full-service brokerage firms charge $250 per trade, which would represent a 50% loss, so you would need a 100% gain to break even.)

Because you are dealing with such a small amount of money, consider limiting the number of different stocks you buy to minimize the commission. If you were to split your $500 into five stocks and the commission is $10 per trade, you would be faced with $50 in fees instead of $10 or $20 if you bought only one or two different stocks.

(For further reading, see Investing 101, The Lowdown on Penny Stocks and Don't Let Brokerage Fees Undermine Your Returns.)

RELATED FAQS
  1. Can you buy penny stocks in an IRA?

    Discover more about penny stocks, how they can be bought utilizing an individual retirement account and the risks penny stock ... Read Answer >>
Related Articles
  1. Investing

    How to Invest in Penny Stocks (ADAT, ANAD)

    Is the lure of finding a diamond in the rough too strong to ignore? Then here's a guide to investing in penny stocks.
  2. Investing

    I Have Only $500 To Invest; Am I Limited To Buying Only Penny Stocks?

    The amount of money an investor has does not restrict her to a certain kind of stock.
  3. Investing

    Understanding Penny Stocks' Risks and Rewards

    Penny stocks can soar in a short period, but dabbling in them is a dangerous game. Here is a breakdown on the risks and rewards of penny stocks.
  4. Tech

    6 Dangerous Moves for First-Time Investors

    First-time investors beware of these potentially disastrous decisions.
  5. Investing

    The Lowdown On Penny Stocks

    Think penny stocks will make you rich? If you don't understand the risks, you could end up penniless.
  6. Trading

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  7. Investing

    How To Invest In Penny Stocks

    Do you find the lure of finding a diamond in the rough too much to ignore? Then consider penny stocks. Just be aware of the risks.
  8. Investing

    Why Do Penny Stocks Fail?

    Penny stocks are speculative and highly risky investments. Lack of government and stock exchange oversight and general information leaves penny stock investors open to sudden losses.
  9. Investing

    Penny Stocks that Had Potential But Failed

    Welcome to the wild world of penny stocks. Here's what to expect.
  10. Investing

    Top Alternatives to Penny Stocks (F, FITB)

    Have the stomach for high risk? Consider these alternatives to penny stocks.
RELATED TERMS
  1. Penny Stock

    A stock that trades at a relatively low price and market capitalization, ...
  2. Penny Stock Reform Act

    A securities act enacted in 1990 that sought to clamp down on ...
  3. Brokerage Account

    An arrangement between an investor and a licensed brokerage firm ...
  4. Investing

    The act of committing money or capital to an endeavor with the ...
  5. May Day

    Refers to May 1, 1975, when brokerages changed from a fixed commission ...
  6. Brokerage Fee

    A fee charged by an agent, or agent's company to facilitate transactions ...
Hot Definitions
  1. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  2. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  3. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  4. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  6. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
Trading Center