How Much Will It Actually Cost Ya to Buy Penny Stocks? The Ultimate Guide

Penny Stocks: The Low-Cost Path to Investing (Or Is It?)

Have you ever scrolled through investment forums and wondered exactly how much cash you need to dive into penny stocks? If you’re looking to get started with minimal investment, penny stocks might seem like the perfect entry point. But there’s more to the story than just the low price tag.

I’ve spent years researching different investment options, and penny stocks consistently raise the most questions from new investors. Today, I’m breaking down everything about penny stock costs – from minimum investments to hidden fees that can eat into your returns.

What Are Penny Stocks, Exactly?

Before we talk money, let’s get clear on what we’re buying. According to the Securities and Exchange Commission (SEC), penny stocks are generally defined as shares that:

• Trade for less than $5 per share
• Usually have a relatively small market capitalization
• Often trade over-the-counter (OTC) rather than on major exchanges

Fidelity sometimes refers to these as “micro-cap stocks” or “small companies.” Many investors are drawn to penny stocks because they perceive them as having attractive features like a low entry price and potential for quick gains.

The Minimum Investment to Start Trading Penny Stocks

So how much do you actually need to get started? Let’s break it down:

The Base Share Price

By definition penny stocks cost less than $5 per share. Looking at Yahoo Finance’s “Most Active Penny Stocks” list, you’ll find stocks priced as low as

• Some trading for literally pennies ($0.01 or less)
• Many popular options between $0.50 and $3.00
• The upper range approaching the $5 limit

For example, from the current listings, we can see stocks like:

• ECOX (Eco Innovation Group) trading at mere fractions of a penny
• PLUG (Plug Power Inc.) at $2.65
• BTBT (Bit Digital, Inc.) at $3.14

Minimum Order Requirements

Here’s where things get interesting. While the stocks themselves are cheap, many brokerages have minimum order requirements:

1. Minimum dollar amount: Some brokers require minimum investments of $100-$500 for penny stock trades
2. Minimum share amounts: Others might require purchases of at least 100 shares
3. Account minimums: Some platforms require a minimum account balance (often $500-$2,000) before trading penny stocks

Broker Fees and Commissions

This is where the “low cost” advantage starts to erode. While many mainstream stocks can be traded commission-free these days, penny stocks often come with fees:

• Per-trade commission: $4.95-$6.95 is common for OTC stocks
• Foreign penny stock fees: Can be $15+ per trade for international penny stocks
• Additional fees for phone orders: If you need broker assistance, expect to pay $20+ extra

For example, while Fidelity offers $0 commission on many online trades, they may still charge fees for certain penny stock transactions, especially for very low-priced securities or foreign penny stocks

Hidden Costs That Most New Investors Miss

Beyond the upfront costs there are several hidden expenses that can dramatically impact your actual investment

The Spread Cost

One of the biggest “invisible” costs in penny stock trading is the bid-ask spread. Because penny stocks are thinly traded (low liquidity), the spread between buying and selling prices can be enormous:

• Blue-chip stocks: Typical spread of 0.1%-0.3%
• Penny stocks: Spreads can range from 5% to over 100% in extreme cases!

This means if you buy a penny stock at $0.50, you might only be able to sell it at $0.30 or less immediately after purchase – an instant 40% loss before any actual market movement.

Impact of Low Liquidity

As Fidelity points out, “When buying or selling a stock that has low trading volume, investors may not be able to do so at their desired price or time, and that can be costly.”

This low liquidity contributes to:

• Higher transaction costs
• Difficulty exiting positions
• Greater vulnerability to price manipulation

Verification Requirements and Delays

Fidelity notes that “Because of the unique risks of investing in penny stocks, Fidelity customers can only buy and sell penny stocks after acknowledging their understanding of the specific risks associated with trading penny stocks.”

This extra verification step can lead to:

• Processing delays
• Missed trading opportunities
• Additional paperwork

Real Cost Calculation: An Example

Let’s run through a realistic example of investing $1,000 in penny stocks:

Scenario: Investing in PLUG at $2.65 per share

1. Base investment: $1,000 ÷ $2.65 = 377 shares (rounded down)
2. Trading commission: $6.95
3. Effective spread cost (assuming 10%): $100
4. Total immediate cost: $1,000 + $6.95 = $1,006.95
5. Real value after purchase (accounting for spread): ~$900

As you can see, your $1,000 investment immediately becomes worth about $900 due to these hidden costs – a 10% loss before the stock price even moves!

The Broker Landscape: Where to Buy Penny Stocks

Different brokers have different fee structures and requirements for penny stock trading:

Why Penny Stocks Attract Investors Despite the Costs

Despite the costs and risks, penny stocks remain popular for several reasons:

The “Ground Floor” Allure

As Fidelity explains, “Who wouldn’t want to have bought in at ground-floor prices of companies before they became big and successful? That’s the hope of many penny stock investors.”

This hope of finding the next big thing drives many investors to accept the higher costs and risks.

The Volume Appeal

Many investors are attracted to the idea of owning thousands of shares instead of fractional shares of more expensive stocks. There’s a psychological appeal to owning 10,000 shares of a $0.10 stock versus 1 share of a $1,000 stock, even though the investment amount is the same.

The Volatility Opportunity

Penny stocks can experience dramatic price swings in short periods – sometimes jumping 50%, 100%, or even more in a single day. This volatility creates opportunities for quick profits that are rarely possible with blue-chip stocks.

The Risks That Make Penny Stocks Expensive in the Long Run

According to Fidelity, penny stocks come with substantial risks that can make them far more “expensive” than their share price suggests:

Lack of Information and Transparency

“A primary risk of penny stocks is the potential for a lack of reliable, readily available information,” notes Fidelity. Many penny stocks aren’t required to file the same detailed financial reports as companies on major exchanges.

This information asymmetry means:

• You might be investing blind
• It’s harder to evaluate true value
• You’re more vulnerable to scams

Vulnerability to “Pump and Dump” Schemes

Fidelity warns that penny stocks are “particularly susceptible to illegal ‘pump-and-dump’ schemes where unscrupulous investors buy the stock, actively promote only its virtues (e.g., ‘pump it up’), and then, if the stock price appreciates, sell it (e.g., ‘dump’) at an artificially inflated price.”

These schemes are incredibly common in the penny stock world, making the real “cost” of entry potentially much higher than the share price.

So Is It Worth It? The Bottom Line on Penny Stock Costs

When all factors are considered, the true cost of buying penny stocks includes:

1. The actual share price (under $5)
2. Broker commissions and fees
3. The cost of the bid-ask spread
4. The opportunity cost of capital
5. The heightened risk of partial or total loss

While you can technically start with as little as $100-$500, a more realistic minimum for meaningfully participating in penny stock trading is around $2,000-$5,000. This provides enough capital to:

• Diversify across multiple penny stocks
• Absorb trading fees without excessive percentage impact
• Withstand some of the volatility inherent in these securities

A Smarter Approach to Penny Stock Investing

If you’re determined to try penny stock trading despite the costs and risks, here are some strategies to minimize your expenses:

1. Choose the Right Broker

Select a broker with:

• Low or no commissions on penny stocks
• No account minimums
• Good execution quality to minimize spreads

2. Start With Listed Penny Stocks

Consider focusing on penny stocks that trade on major exchanges (like NASDAQ or NYSE) rather than OTC markets. These typically have:

• Lower spreads
• Better liquidity
• More regulatory oversight

Looking at Yahoo Finance’s current list, stocks like PLUG (Plug Power Inc.) at $2.65, JBLU (JetBlue Airways) at $4.42, and LAC (Lithium Americas Corp.) at $4.88 all trade on major exchanges.

3. Use Limit Orders, Not Market Orders

Always use limit orders when trading penny stocks. This specifies the maximum price you’re willing to pay, helping to protect you from unexpected spread costs.

4. Allocate Only a Small Portion of Your Portfolio

Given the high risk, most financial advisors suggest limiting penny stock investments to no more than 5-10% of your total portfolio.

Final Thoughts: The Real Cost of Penny Stock Trading

While the barrier to entry for penny stocks is indeed low in terms of share price, the total cost of effective penny stock trading is much higher when accounting for fees, spreads, and risks.

As Fidelity bluntly states, “Investing in penny stocks entails significantly more risk compared with investing in established companies.” This elevated risk profile is part of the true “cost” of entry.

For most investors, especially beginners, the actual costs and risks of penny stocks may outweigh the perceived benefits of their low share prices. Alternative approaches like fractional shares of quality companies or low-cost index funds often provide better risk-adjusted returns with lower overall costs.

But if you’re still drawn to the potential of penny stocks, now you know exactly what costs to expect – both visible and hidden – when you take the plunge.

Have you tried investing in penny stocks before? What was your experience with the costs involved? I’d love to hear your thoughts!

A specific “penny share price” isn’t available because it refers to a category of stocks, not a single one. Penny stocks are shares of small companies that trade for under $5 per share in the United States, and under £1 in the UK.

Most Active Penny Stocks