Penny Stocks 101

Getting started with penny stocks is simple and can be fun and profitable

Man Teaching Stock Market Investing
Photo: Getty Images

Getting started with penny stocks, sidestepping the common pitfalls, and finding the best investments, are all much easier than most people realize. In fact, if you can open an online bank account, you can just as easily trade low-priced shares.

Key Takeaways

  • Penny stocks are low-priced shares of small companies that aren't traded on an exchange, and they come with some significant risk.
  • Consider practicing on paper first and learning the ropes before you jump into trading penny stocks.
  • Investing only money that you can lose without suffering a financial setback can help you avoid making trades based on emotion.
  • These securities tend to attract scam artists and pump-and-dump schemes because of their price.

Before You Begin

Most investors are anxious to get their money into the markets. They want a few hundred dollars to start changing their life. With that attitude, you might be heading toward failure.

You should always start with no money and zero risk. Paper trading is a wonderful method to see how much you would have made (or lost). There isn't any rush to skip this step, because the penny stock market will always be there waiting for you.

You do not need fancy software, the best broker tools, or the latest apps. You need a pencil and a piece of paper. Paper Trading, instead of jumping in before you can demonstrate (theoretical) profits, is and will be the single best decision you will ever make in penny stocks.

Avoid Common Risks

Risk Money

You have probably heard about using "risk money" with speculative investments. Risk money is money that you would be okay with losing 100% of when investing. Beyond the obvious reasons to keep your rent check and grocery money out of the latest five-cent stock, there is an abstract benefit that is widely unknown.

Investors who feel stress, frustration, impatience, and obsession with their investments tend to act emotionally rather than meticulously. Trading decisions are typically made for the wrong reasons and bring the wrong results.

Risk money, on the other hand, results in looser, more patient, and wiser behavior. With this attitude, better decisions are made.

Discount Stock Broker

All you need in order to trade shares of any kind is an (online discount) stockbroker. Opening an account typically involves filling out a few forms, and most people are up and running within days. Depending on the policies of the broker you choose, there is a required minimum amount of cash which needs to be deposited, ranging from zero to tens of thousands of dollars.


Many brokerage firms will require you to sign a penny stock risk-disclosure form before you can trade them.

Once the money is deposited, and your account is set up, you will be able to use those funds to buy and sell stock, which leads us to the most important part of trading penny stocks.

Risks of Penny Stocks

Penny stocks can be very risky. These are low-priced shares of small companies that are not traded on an exchange or quoted on the Nasdaq. Pricing can be unavailable, and there is a risk that you will not be able to sell your shares. These securities can also be susceptible to pump-and-dump schemes, unusual auditing issues, SEC trading suspensions, and situations in which assets are large but revenues are small.


For more information, please review the risks with your financial advisor, or visit the FINRA website.

Start Smart

Start smart, use only risk money, and learn how to find the best stocks before you begin. Trading is simple, and even better, it is fun. When you turn a few dollars into something more substantial, you will be absolutely hooked!

Frequently Asked Questions (FAQs)

Are penny stocks a good investment?

Whether or not penny stocks are a good investment depends on your investment strategy. If you don't want to take risks, or if losing the money would threaten your financial security, then risky investments like penny stocks may not be a good idea.

Why do penny stocks exist?

There are two reasons why apenny stock might exist. First, a company may simply choose to price its stock low. Business owners can offer shares at whatever price they want. Second, a company might have initially had a higher stock price, but then market forces might have pushed it down until it became a penny stock.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Financial Industry Regulatory Authority. "Penny Stock Risk Disclosure Document."

  2. U.S. Securities and Exchange Commission. "Spotlight on Microcap Fraud."

Related Articles