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 Mobiquity Technologies (MOBQ),which is trading over-the-counter (OTC) for $0.10, you can buy 5,000 shares, but you can also buy only five shares of Walt Disney (DIS) trading at $100 on the New York Stock Exchange (NYSE). 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 the 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 (GE) or Microsoft (MSFT) - 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. (Learn to trade penny stocks with Investopedia Academy's online day trading course.)

(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

    Penny stocks are highly speculative and very risky for many reasons, including their lack of liquidity and small market capitalization.
  2. 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.
  3. 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.
  4. Tech

    6 Dangerous Moves for First-Time Investors

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

    Penny Stocks Vs. Forex: Which Is Right for You?

    Learn more about penny stock trading and forex market trading, and why each investment class appeals to different types of investors.
  6. Investing

    Start Investing With Only $1,000

    You can get started as an investor with as little as $1000. Here's how.
  7. Investing

    Top Alternatives to Penny Stocks (F, FITB)

    Have the stomach for high risk? Consider these alternatives to penny stocks.
  8. Financial Advisor

    Don't Let Brokerage Fees Undermine Your Returns

    Smart investors don't give away more money than necessary in commissions and fees. Find out how to save.
  9. Managing Wealth

    Should You Buy US Penny Stocks Or Emerging Market Stocks?

    While in the same asset class, emerging market stocks and US penny stocks have significant differences that can impact your portfolio.
  10. Investing

    Penny Stocks, Options And Trading On Margin

    While investing in penny stocks is risky, it can sometimes be lucrative.
RELATED TERMS
  1. Penny Stock Reform Act

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

    An arrangement between an investor and a licensed brokerage firm ...
  3. Commission

    A commission is a service charge assessed by a broker or investment ...
  4. Stock Market

    Exchanges or over-the-counter markets in which shares of publicly ...
  5. Matching Pennies

    A basic game theory example that demonstrates how rational decision-makers ...
  6. Budget

    An estimation of revenue and expenses over a specified future ...
Hot Definitions
  1. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  2. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  3. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  4. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  5. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  6. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
Trading Center