How much money do you need to start investing in penny stocks?

A lot of investors are drawn to penny stocks’ promise of huge returns. And it’s true that these shares have massive price swings in the high double and even triple digits, usually over a fairly short period of time. The extreme volatility is just one reason penny stocks are risky and highly speculative assets. Only trade penny stocks with money you can afford to lose. Although penny stocks are defined as any stock that sells below $5 a share, there are quite a few that trade for literal pennies, or even fractions of pennies, which means you can buy a lot of shares with a relatively small investment. A $500 investment can buy 1,000 shares of a penny stock trading at $0.50; that same investment would buy just 10 shares of value stock Delta Air Lines. It’s tempting to think there is some huge advantage to having 1,000 shares versus 10 shares, but a 10% gain on a $500 investment is the same, regardless of the number of shares you own. Don’t confuse price with value when you’re dealing with penny stocks. How much you need to trade penny stocks depends on your brokerage account minimum requirements. All online brokers trade stocks on the major exchanges, and there are plenty of stocks under $5 on the big boards. However, both Nasdaq and the NYSE have rules about stocks trading below $1. For true penny stocks, you’ll need to find a broker that handles trades on the pink sheets and OTC bulletin boards. Most, although not all, do. You’ll usually need to have at least $500 to open an account, and there may be other conditions if you’re trading penny stocks. Because penny stocks are not long-term investments, you make more trades, so it’s important to understand your broker fees and any other restrictions or conditions they have on penny stock trades. If your broker charges a surcharge or has limits on the number of shares you can trade in one order or one day, it eats into profits, especially on the low-dollar trades. Some people get into penny stocks because they see them as a way to get into the market without a lot of cash. But if you’re making $100 trades and your broker fees are $15 round trip, you’ve got to make 15% on the trade just to break even. If you’re making $1,000 trades, on the other hand, $15 in broker fees isn’t as much of an issue. The next thing is how often you plan to trade. If you trade often enough to meet the SEC’s definition of a pattern day trader, which broadly speaking means you make more than four round-trip trades over five business days, you have to have at least $25,000 in a margin account. When you’re trading penny stocks, you should have enough in your account to stay in the game. The nature of penny stocks means you are going to have some big losses, and hopefully a few big wins, but if you are trading with just $1,000 and you can’t close a position fast enough to avoid a huge loss on a trade, you might end up with just $500 or so in your account, and it’s very hard to make enough winning trades to recoup your losses with just $500 to trade. Most people who are serious about trading penny stocks start with about $5,000, because at that amount, you’re able to make decent-sized trades and still stay within a prudent maximum risk level of 2% per trade. Bottom line—penny stocks are volatile, high-risk, and speculative securities, and they really aren’t an appropriate choice for most investors, especially those without a lot of capital to risk. If you don’t have a lot of money to invest, or the money you do have is earmarked for other savings goals, you should think twice before jumping into penny stocks.