No, you are not required to invest 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 ABCTUVWXYZ Corporation trading over-the-counter (OTC) for $0.10, you could hypothetically buy 5,000 shares. You could also buy five shares of Walt Disney (DIS) trading at $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.
Regardless of how much money you have available to invest, 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.
If you are a new investor, you may want to consider blue-chip companies —such as Apple (AAPL) or Visa (V)— which tend to have long-established track records of operations and trade on exchanges that are closely regulated by the SEC. These characteristics are not found in the over-the-counter markets where penny stocks are traded. Although, even if you invest in the big players, trading stocks still involves some level of risk.
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 less fees and restrictions, such as a 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 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 be faced with $50 in fees instead of $10 or $20 if you bought only one or two different stocks.