What do i do if my little boy walks around holding his penis at 3?

Gently discourage: This is not abnormal behavior. The penis may be rubbing on his clothing & with irritation, he touches it. He may be stimulated otherwise. Gently discourage this with the least of admonishment & try to talk to him about not doing this when it public. Don't make a big issue out of it. It could cause more harm than good. Certainly don't embarrass him. A good thing would be to pick him up/hug him.

This is normal: It feels good to him. Tell him it's ok when he is alone but is not a nice thing to do in company.