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Forget Penny Stocks: Here's a Better Investment if You're Short on Cash

By Maurie Backman - Mar 23, 2021 at 5:36AM

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Having limited funds to work with doesn't mean quality investments are off the table.

Investing is an easy way to grow wealth over time, but you need money to do it. Now the good news is that you don't need a lot of money -- you can start investing with $100, or even less if that's all you've got. But if you don't have a lot of money to buy stocks with, your choices may be limited.

For example, right now, Netflix (NFLX 4.15%) is trading for around $512 a share. But if you only have $100 to invest, you can't swing a full share of Netflix.

It's for this reason that people with limited funds tend to seek out penny stocks. Penny stocks trade for under $5 a share, and that price point tends to appeal to investors on a budget.

There are a few problems with penny stocks, however. For one thing, many don't trade on major public exchanges, and so the companies behind them aren't subject to the same disclosure requirements as companies that are, say, part of the S&P 500 index. As such, those companies' financials can be trickier to vet.

Pie with image of hundred-dollar bill cut into pieces

Image source: Getty Images.

Also, the companies behind penny stocks tend to be newer, and while that's not always a bad thing, you don't get the same comfort level as with older, more established companies. Netflix, for example, has been around for more than 20 years and has been publicly traded for almost 20. As such, if you're thinking that penny stocks are your best option for breaking into the world of investing on a budget, it pays to consider an alternative option -- fractional shares.

The upside of fractional shares

Fractional shares let you buy a piece of a share of stock if you can't swing a whole share. In our example above, it's clear that $100 won't buy a full share of Netflix, but it could buy about one-fifth of a share, and then you'd still get to enjoy the benefit of having Netflix in your portfolio.

The upside of fractional shares is that they allow you to invest in the same quality companies you'd want to own a piece of if money weren't an issue. Also, fractional shares allow you to build a diversified portfolio with little money. And that's important, because owning an array of stocks could help you not only make money, but avoid serious losses in the event of a market crash.

Now not every brokerage offers fractional shares, but many do these days, and a simple online search will help you determine which ones give you that option. From there, it's a simple matter of seeing which companies can be bought in fractional form (some stocks can't be bought on a fractional basis, but many can).

Of course, if you're feeling adventurous and want to put a small amount of money into penny stocks, go for it. But before you do, understand the risks involved -- and recognize that there may be a better way to stretch your limited investment dollars and use them to scoop up quality stocks you'll be proud to hold for a long time.

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