How to Invest Your First $500 Without Turning to Penny Stocks

Even if you only have $500 to start investing, you are not limited to investing only in penny stocks. Investors are generally not restricted to a certain kind of stock based on the amount of money they have. A $500 investment is the same, no matter how many shares you purchase or how high the share price.

For example, if you were to invest in a hypothetical ABC Corporation at $0.10 a share, you could buy 5,000 shares for $500. Or you could buy five shares of Walt Disney (DIS) trading around $100 on the New York Stock Exchange (NYSE). Although there are fewer shares in the second case, the total value of the investment is the same.

The best online brokers and best brokers for penny stocks offer tools to help investors start trading, but it is very important to understand that penny stocks are generally the highest-risk stocks in the market. They may seem attractive since a rise from $0.10 to $0.15 represents a 50% increase, but penny stocks also have a high chance of generating large losses. Below, we discuss some lower-risk investing strategies that represent better opportunities to earn a return on your money while learning the ins and outs of investing.

Key Takeaways

• The amount of money an investor has generally does not restrict them to investing in a certain kind of stock.
• You’re not relegated to investing in penny stocks just because you have a small amount to invest.
• Penny stocks are some of the highest-risk stocks in the market; there are other lower-risk investments that could represent a better opportunity, especially for the beginning investor.
• Beginning investors who have a small amount to invest often start by investing in blue-chip stocks, dividend stocks, or exchange-traded funds (ETFs).
• Brokerage commissions and fees can reduce returns, so an online discount broker can be a good alternative for cost-conscious investors.

Why Are Penny Stocks Volatile?

Penny stocks are often shares of small companies that trade for less than $5, often on over-the-counter (OTC) markets rather than on major exchanges like the NYSE or Nasdaq. These stocks gained their nickname from their historically low share prices, sometimes trading for mere pennies, which can make them appear attractive to small investors with limited capital. However, this perceived accessibility often masks their inherent risks and speculative nature.

Unlike larger companies with proven business models, penny stock companies frequently represent startups, early-stage ventures, or distressed businesses trying to turn around their operations. Many of these companies may operate in emerging industries or unproven markets, adding another layer of uncertainty to their already volatile nature.

The combination of their small size and questionable financial status means these companies are particularly vulnerable to volatility, economic downturns, or even rumors that might have minimal impact on larger, more established corporations.

• Limited information: OTC markets don’t require the same strict listing or disclosure requirements as major exchanges. Many penny stock companies, therefore, have minimal public information available, making it difficult to research their financial health and business operations properly.
• Low liquidity: These stocks often have low trading volumes, meaning you might have trouble selling your shares when you want to. This low liquidity and shallow market depth can lead to dramatic price swings based on relatively small trades.
• Wide bid-ask spreads: Relatedly, the bid-ask spreads in penny stocks can be wide. This difference between the buying and selling price can be proportionally large, meaning you need a significant price increase just to break even on your investment.
• Lack of history: Many penny stock companies are new or struggling businesses without established track records, making their future performance highly unpredictable.
• Manipulation risk: The low price and limited regulation of penny stocks make them more vulnerable to schemes like “pump and dump,” where fraudsters artificially inflate the price before selling their shares, leaving other investors with losses.

Alternatives to Penny Stocks

Blue-Chip Stocks

If you are a new investor, you may want to consider blue-chip companies—such as Apple (AAPL) or Walmart (WMT)—which tend to have long-established track records of operations and trade on exchanges that are closely regulated by the Securities and Exchange Commission (SEC). These characteristics are not found in the over-the-counter markets where many penny stocks are traded. Although, even if you invest in the big players, trading stocks still involves some level of risk.

With fractional share investing now available through many brokers and with zero commissions on stock trades, you can start investing in blue-chip stocks with as little as $1 to $5, making your $500 enough to build a small portfolio of several major companies.

Dividend Stocks

Not all stocks pay dividends, but those that do are some of the strongest performers in the market. Companies that pay dividends have substantial amounts of cash and reward their shareholders with regular dividend payouts in the form of cash or additional stock. This extra income is enticing to many investors, along with the fact that many dividend stocks are in defensive sectors that do well even in bear markets.

Many quality dividend-paying stocks trade between $20 and 100 per share, meaning your $500 could buy several shares of a reliable dividend-payer or be split between two to three different dividend stocks for diversification.

Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are a popular investment option for beginning investors who have only a small amount to invest. Rather than picking individual stocks, ETF investors buy a fund comprised of a basket of securities that trade on an exchange just like stocks.

To get started investing in an ETF, you only need enough money to pay for one share plus commissions and fees. Moreover, many brokers also now allow fractional ownership of ETF shares. ETFs also offer investors diversification, low expense ratios, and a range of investment choices.

Robo-advisors

Robo-advisors are automated investment apps that optimize diversified portfolios on behalf of ordinary investors. Examples like Betterment, Wealthfront, or major brokers’ automated investing services typically have low minimum investments (some as low as $1 to $10) and automatically create well-designed portfolios based on your goals and risk tolerance. They handle rebalancing and reinvestment of dividends, making them ideal for hands-off investors.

Additionally, most charge relatively low fees (typically 0.25% to 0.50% annually) and can be a good option for putting your entire $500 to work immediately.

Watch Out for Commissions and Fees

If you want to invest in stocks with relatively little money, it is especially important to take into account trading commissions and the minimum-deposit requirements imposed by some brokerage accounts. Before investing, you might find that it is better to put the $500 into something with fewer fees and restrictions—such as a high-yield savings account—until you can save up more to invest. Consider using an online discount broker, which tends to have the lowest fees (under $10 per trade).

Even with a discount broker, commission fees act as negative returns. So, do try to minimize them as much as possible. For example, if the commission is $10 per trade, after making one trade with your $500, your portfolio will have $490 in market value. In other words, you have already lost 2% on your total investment. Some full-service brokerage firms charge $250 per trade, which would represent a 50% loss, so you would need a 100% gain just to break even.

When you are investing with such a small amount of money, consider limiting the number of different stocks you buy to minimize the commission. If you were to split your $500 into five stocks and the commission is $10 per trade, you would face $50 in fees instead of $10 or $20 if you bought only one or two different stocks. For the truly cost-conscious investor, a low-cost online broker might be the best choice. Many have eliminated trading fees for standard stock trades, although they continue to charge commissions for more advanced trading, such as options.

In the past few years, most discount brokerages have moved to commission-free trading for most stocks and ETFs, which has made trading fees less of an issue for small investors.

What Are the Safest Stocks for Beginners to Invest In?

While no stock is completely safe, many financial advisors recommend starting with large, well-established companies known as “blue-chip” stocks. Companies like Microsoft (MSFT), Johnson & Johnson (JNJ), and Procter & Gamble (PG) have long histories of stable operations, consistent dividends, and strong market positions. Alternatively, rather than putting all your money in one stock, beginners might be even safer starting with a low-cost index ETF that tracks the S&P 500, as this provides instant diversification across 500 of America’s largest companies.

Are Penny Stocks Good For Beginners?

No, penny stocks are generally not recommended for beginners or those with limited capital to risk in the markets. Despite their low share prices, penny stocks carry significant risks—including high volatility, limited company information, potential for fraud, and low trading volume—which can make it difficult to sell your shares. Beginners are better served by starting with more established investments like index funds, blue-chip stocks, or ETFs, which offer better transparency, liquidity, and typically lower risk profiles.

What Is The Minimum Amount Of Money Needed To Start Investing In Stocks?

Thanks to fractional share investing, you can start investing in stocks with as little as $1 to $5, depending on your broker. Many popular online brokers like Fidelity, Charles Schwab, and Robinhood offer commission-free trading and fractional shares, allowing you to buy portions of expensive stocks or ETFs. This means you could invest in companies like Amazon (AMZN) or Alphabet (GOOGL) without needing to buy a full share, which might be expensive. Robo-advisors furthermore offer diversified portfolios that automatically rebalance, with minimums starting sometimes as little as $5 to get started.

How Do I Know if a Stock Is Worth Investing In?

Before investing in any stock, research the company’s financial health by looking at metrics like revenue growth, profit margins, debt levels, and price-to-earnings (P/E) ratio. Also consider the company’s competitive position, industry trends, and management team. However, for beginners, it’s often wise to start with index funds or ETFs rather than trying to pick individual stocks. These funds provide professional management and diversification, reducing the research burden on new investors.

Should I Invest All My Money at Once or Space It Out Over Time?

Some financial advisors recommend dollar-cost averaging, which means investing fixed amounts at regular intervals rather than all at once. This strategy helps reduce the risk of investing all your money at a market peak and can help you develop disciplined investing habits. For example, if you have $500, you might invest $100 per month over five months, or $50 every week over ten weeks. This approach can be particularly beneficial for beginners who are still learning about market dynamics.

The Bottom Line

Starting your investment journey with $500 doesn’t mean you’re limited to penny stocks or high-risk investments. In fact, today’s financial markets offer more accessible options than ever for small investors, thanks to fractional shares, commission-free trading, and low-minimum investment products. Whether you choose to invest in blue-chip stocks, dividend-paying companies, ETFs, or use a robo-advisor, the key is to focus on building a diversified portfolio that matches your risk tolerance and long-term financial goals. While penny stocks might seem attractive due to their low share prices, beginning investors are typically better served by more established, regulated investment options that offer greater transparency and lower risk. Remember: it’s not about how many shares you own, but rather the total value and quality of your investments.