"Penny stocks" are stocks that cost $5 or less per share. Because the price is so low, an investor can purchase a large number of them. That can mean significant profit if the value increases by a few cents per share. There are no hard and fast rules on the amount you need to begin trading penny stocks, but several factors can affect your initial investment.
Brokers often require a minimum deposit for new accounts, especially if you're opening a margin account. A margin account allows you to trade with the broker's money. The required balance varies by brokerage firms, but it typically ranges from $500 to $2,500. The amount is higher for pattern day traders. Because they make several trades of significant amounts per week, they must deposit a minimum of $25,000.
Another factor to consider is the commission you'll pay your broker. This can be quite high, but the amount varies by broker and the size of the trade. Full-service brokers typically charge a higher commission for a trade involving a large number of shares, and a lower commission for one involving a smaller number of shares. Your broker will charge a commission each time you buy or sell penny stocks. For day traders, who execute several trades per week, commissions can be expensive. When you select a broker, find out what the charge would be, and use this to determine your initial investment.
Brokers charge fees in addition to commissions. These could include fees for account maintenance, transferring assets between accounts, account inactivity and margin loans. Examine your agreement carefully to determine possible charges, and take these into consideration when you make a deposit.
Your personal goals could help you determine how much money to invest in penny stocks, in addition to any deposit your broker might require. These could include the number of stocks you wish to hold, the length of time you plan to hold them, and the amount of money you hope to earn in a period of time. For instance, a trader who wishes to make a profit by a specific date might invest an amount of money in a stock that he thinks would achieve this goal, based on its recent performance. It's best to trade only with money you'd be comfortable losing if your trade were unsuccessful.
Penny stocks allow you to hold more low-priced shares with a modest investment than you could if you purchased higher-priced stocks. However, the Securities Exchange Commision considers penny stocks volatile because there is no way to affirm prices, and you might not find a buyer for your shares. Also, some of these stocks are manipulated to defraud investors, according to Andy Dunn in "Great Companies, Great Charts." It's best to research a company thoroughly and to ensure that it's legitimate before you buy its stock.