How much should I risk on penny stocks?

When investors are thinking about making a quick buck, they often turn to the world of penny stocks. Penny stocks aren’t really sold for a penny, but they trade for under $5 per share, and some trade lower than $1 a share. This means you can buy a lot of shares without risking a lot of money. That means even an increase of a dime can lead to a nice profit. But how much money should an investor risk on penny stocks? There are no solid opinions on how much to invest in penny stocks, and beyond some broker and regulation requirements it will depend on the individual investor and their financial situation. In general, no more than 10% of your investment capital should be allocated to penny stocks. With that in mind you also have to consider the requirements of your broker. Many brokers have minimum deposit requirements which start at $500. If you want a margin account, that amount will be much higher, and those who want to short a stock will need a margin account. Consider $2,000 as a good starting point. You also have to think about how many trades you will be making. If you buy and sell a stock in the same day four times in a five business day period they consider you a “pattern day trader.” To continue trading, you need to have a minimum of $25,000 in your account. The most important consideration when deciding how much to risk on penny stocks is your own financial situation. How much can you afford to risk, how many stocks do you want to hold at once, how much will you have to pay your broker in fees are all considerations? You’ll likely also think about how much you stand to earn from your investment, but that’s impossible to know ahead of time. By knowing your costs, risks and potential returns you can have a better experience with penny stocks, and if you keep your risk within acceptable limits, you’ll also have a less stressful trading experience.