Investing Assets & Markets Stocks Penny Stocks 101 Getting started with penny stocks is simple and can be fun and profitable By Peter Leeds Peter Leeds Peter Leeds is an expert on investing in stocks, and has over a decade of experience working with financial planning, derivatives, equities, fixed income, project management, and analytics. He is the author of several books including "Penny Stocks for Dummies." He publishes the financial newsletter, "Peter Leeds Stock Picks" and has appeared on NBC, CBS, Fox, CNN, and several dozen other outlets. learn about our editorial policies Updated on April 26, 2022 Reviewed by Chip Stapleton Reviewed by Chip Stapleton Chip Stapleton is a Series 7 and Series 66 license holder, passed the CFA Level 1 exam, and is a CFA Level 2 candidate. He, and holds a life, accident, and health insurance license in Indiana. He has eights years' experience in finance, from financial planning and wealth management to corporate finance and FP&A. learn about our financial review board Fact checked by Hans Jasperson Fact checked by Hans Jasperson Hans Jasperson has over a decade of experience in public policy research, with an emphasis on workforce development, education, and economic justice. His research has been shared with members of the U.S. Congress, federal agencies, and policymakers in several states. learn about our editorial policies In This Article View All In This Article Before You Begin Avoid Common Risks Discount Stock Broker Risks of Penny Stocks Start Smart Frequently Asked Questions (FAQs) 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. Note 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. Note 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? Thanks for your feedback! Tell us why! Other Submit Sources 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. Financial Industry Regulatory Authority. "Penny Stock Risk Disclosure Document." U.S. Securities and Exchange Commission. "Spotlight on Microcap Fraud."