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.)

  1. Do penny stocks trade after hours?

    Penny stocks are common shares of public companies that trade at a low price per share. These companies are normally small, ... Read Full Answer >>
  2. Do penny stocks pay dividends?

    Because of the small market capitalization and revenues typical of most penny stocks, there are very few that offer dividends. ... Read Full Answer >>
  3. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  4. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  5. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  6. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
Related Articles
  1. Active Trading

    10 Steps To Building A Winning Trading Plan

    It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.
  2. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  3. Fundamental Analysis

    Buy Penny Stocks Using the Wisdom of Peter Lynch

    Are penny stocks any better than playing penny slots in Vegas? What if you used the fundamental analysis principles of Peter Lynch to pick penny stocks?
  4. Forex Education

    Time Value Of Money: Determining Your Future Worth

    Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation.
  5. Investing Basics

    A Simplified Approach To Calculating Volatility

    Volatility is sometimes greater than anticipated, but the way it’s measured can compound the problems that occur when it’s unexpected.
  6. Investing Basics

    Should You Trade Forex Or Stocks?

    Deciding whether to trade stocks, foreign exchange or futures contracts typically comes down to risk tolerance, account size and convenience.
  7. Investing Basics

    What's a Benchmark?

    A benchmark is a standard investors choose to gauge the performance of their portfolios.
  8. Investing Basics

    How MasterCard Pulled Off a Buyback

    Stock buyback refers to publicly traded companies buying back their shares from shareholders. Why would they do that?
  9. Entrepreneurship

    How To Raise Seed Capital and Grow Your Startup

    To get a business off the ground, entrepreneurs need a clear understanding of how to strategically position themselves for VC firms and angel investors.
  10. Trading Strategies

    The Elements of a Perfect Momentum Trade

    Five technical elements build profits in high-risk momentum trading strategies.
  1. Markdown

    The difference between the highest current bid price among dealers ...
  2. Catalyst

    A catalyst in equity markets is a revelation or event that propels ...
  3. Investing

    The act of committing money or capital to an endeavor with the ...
  4. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  5. Hindsight Bias

    A psychological phenomenon in which past events seem to be more ...
  6. Penny Stock Reform Act

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

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center