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. A$500 investment is the same no matter how many shares you purchase or how high the share price.
For example, if you were to invest in ABCTUVWXYZ Corporationtrading over-the-counter (OTC) for $0.10 a share, you could hypotheticallybuy 5,000 shares.You could also buyfive 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.
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 also have a high chance of generating large losses. Below we discuss some lower-risk investing strategies that represent better opportunities to earn a return on your money while learning the ins and outs of investing.
Key Takeaways
- The amount of money an investor has does not restrict them to invest in a certain kind of stock.
- You're not relegated to investing in penny stocks just because you have a small amount to invest.
- Penny stocks are some of the highest-risk stocks in the market; there are other lower-risk investments that could represent a better opportunity, especially for the beginning investor.
- Beginning investors with a small amount to invest often start by investing in blue chip stocks, dividend stocks, and exchange traded funds (ETFs).
- Brokerage commissions and fees can eat away at your returns; an online discount broker can be a good alternative for cost-conscious investors.
Blue Chip Stocks
If you are a new investor, you may want to considerblue-chip companies—such as Apple(AAPL) or Walmart (WMT)—which tend to have long-established track records of operations and trade on exchanges that are closely regulated by the Securities and Exchange Commission (SEC). These characteristics are not found in the over-the-counter marketswhere penny stocks are traded. Although,even if you invest in the big players, trading stocks stillinvolves some level of risk.
Dividend Stocks
Not all stocks pay dividends, but those that do are some of the strongest performers in the market. Companies that pay dividends have substantial amounts of cash and reward their shareholders with regular dividend payouts in the form of cash or additional stock. This extra income is enticing to many investors, along with the fact that many dividend stocks are in defensive sectors that do well even in bear markets.
Exchange Traded Funds (ETFs)
Exchange traded funds (ETFs) are a popular investment option for beginning investors who have only a small amount to invest. Rather than picking individual stocks, ETF investors buy a fund comprised of a basket of securities that trade on an exchange just like stocks.
To get started investing in an ETF, you only need enough money to pay for one share plus commissions and fees. ETFs also offer investors diversification, low expense ratios, and a range of investment choices.
Watch Out forCommissions and Fees
If you want to invest in stocks with relatively little money, it is especially important to take into account trading commissions and the minimum-deposit requirements imposed by some brokerage accounts. Before investing, you might find that it is better to put the $500 into something with fewer fees and restrictions—such as a high-yield savings account—until you can save up more to invest.Consider using an online discount broker, which tends to have the lowest fees (under $10 per trade).
Even with a discount broker, 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, your portfolio will have$490 in market value. In other words, you have already lost 2% on your total investment.Some full-service brokerage firms charge $250 per trade, which would represent a 50% loss, so you would need a 100% gain just to break even.
When you are investing 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 the truly cost-conscious investor, a low-cost online broker might be the best choice. Many have eliminated trading fees for standard stock trades, although they continue to charge commissions for more advanced trading, such as options.
