Questions like, “how much do I need to get started in penny stock investing” and “what’s the minimum I need to trade penny stocks” are all over the internet. In fact, they occur on a daily basis over at Yahoo Answers. Everyone is excited about the potential profits and is ready to get started head first. Let’s look at how much you need before you can trade your first penny stock.
To be honest with you, I do not completely agree with investing in penny stocks and am currently not investing in them myself. If you have not read my guide on the dangers of penny stocks you should check that out now. This will explain to you some of the dangerous and common scams that occur. After you have read that read my article on some of the better books on penny stocks.
My goal is to try to illustrate in a very blunt and realistic way what many people on Yahoo Answers, Wiki Answers and many online message boards and forums are failing to understand: to seriously invest in penny stocks, you should have a lot of money.
In the following sections will be coming up with a few examples of penny stocks rising by one penny. There are stories of penny stocks rising several penny’s and dollar amounts, creating 1,000% gains. Although these can happen, they are often hype and the result of scams.
Many people use the example of Timothy Sykes to illustrate how easy it is and how little you need to invest in penny stocks. However, Timothy’s initial investment was well over $10,000. If you are unfamiliar with his story, he received this money from his Bar Mitzvah it can be found in the series, Wall Street Warriors. Many people asking this question of, “how much” are looking to invest far less.
Most questions ask about investing $500 or a $1,000 and some even have aspirations of turning $50 or $100 into penny stock riches. I think it is fair to say that those dreams are pie in the sky. Let’s take a look at some potential returns from penny stocks.
Let’s that I am buying penny stock XYZ for $0.01 for the sake of simplicity; not an uncommon bid/ask price. Let’s say we invest $1,000 in this stock. Thus we would own 100,000 shares! Much of the appeal of investing in penny stocks is in owning so many shares. It is much cooler and emotionally satisfying to own 100,000 shares rather than 10-20. Of course, investing with emotion and on what is cool can and will be disastrous.
Let’s get to the meat of the example. If our sample stock XYZ goes up to $0.02, we will make $1,000 profit and our money will have doubled to $2,000. That can be very tempting. The same example works if we only invested $100. If the stock went up to $0.02 we would now have $200. Thus it is easy to see that Timothy Sykes did not have to wait too long to turn his five figure investment into more than one million dollars.
It would appear that regardless of our investment size, any small gain of just $0.01 in a “penny stock” would lead to a double in profits, a 50% gain, largely unheard of in traditional markets. Based on this example $100 is just as good as $1,000 to start, but that’s not the end of the story.
As the share price gets larger though, say for example a penny stock trading at $0.08, the percentage gain for only one cent becomes a lot less than our example. If a $0.08 stock rises to $0.09 and we invested $1,000 in our original example we would now have only $125 profit. That amounts to a 12.5% increase. Of course that is still a great profit but nothing like the first example!
In the examples above we assumed that all else was equal. We assumed only positive gains, which are hardly likely. However we also did not calculate trading costs which is one reason why investing $100 in penny stocks can be absolutely foolish.
Trading stocks with a discount broker is usually fairly priced, roughly $4-7 per trade. However, many brokers will place an additional fee on penny stocks. Others will not cater to the vast majority of them because they are over-the-counter trades.
In our second example, using only $100 and buying 10,000 we are going to be down already 4-7% based on the trading fees of our platform, not including the additional fees, which are often higher when it comes time to sell. This makes investing small amounts in penny stocks foolish. If we were to invest with $1,000, assuming the trading fees were between $4-7 again we would be down 0.4-0.7%. That is a whole different world compared to the $100 invested.
If you were investing in a penny stock and it was not trading at an actual penny, percentage gains are going to be a lot less when the stock price rises by a penny, which they commonly do. So, investing only $100, $500 and even $1,000 will take you a lot more time to reach the million dollar mark.
Please do not forget the trading fees. $4 to make a trade doesn’t sound like much and it isn’t if you are trading with $1,000 but if you only have $100, being down 4% is an awful way to start.
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