How To Buy Penny Stocks
FINRA sets a requirement of $25,000 in your brokerage account to begin, but there are other online brokerages that allow you to trade with a lower minimum. Check with your penny stocks app or broker to learn more.
how to buy penny stocks
When using TradeStation for trading OTC penny stocks, the cost under the TS Select and TS Go pricing plans is $0 per trade up to 10,000 shares ($0.005 per share thereafter). TradeStation ranked among Best in Class in our Commissions and Fees and Investment Options categories for 2023. Read full review
Despite charging $6.95 for penny stock trades (regular stock trades are $0), TD Ameritrade offers a comprehensive selection of trading tools through the thinkorswim trading platform. While not our top pick for trading penny stocks, TD Ameritrade took our annual award for best trader app and placed second overall among top brokers. Read full review
In addition to our top five trading platforms for penny stock trading in 2023, we reviewed 12 others: Ally Invest, Charles Schwab, eToro, Interactive Brokers, J.P. Morgan Self-Directed Investing, Merrill Edge, SoFi Invest , Tradier, Robinhood, tastytrade, Vanguard and Webull.
To dive deeper, read our full reviews.What are penny stocks?Definitions of penny stocks vary. According to the U.S. Securities and Exchange Commission, or SEC, "penny stock" generally refers to a security issued by a very small company (i.e., micro-cap) that trades at less than $5 per share. The most common penny stocks are companies that trade for pennies per share (less than $1). We think of penny stocks as microcap companies with prices under $5 that only trade over the counter.
As an example of the risks involved, penny stocks are often targeted for so-called pump and dump schemes. Promoters of such schemes will lure in investors with the goal of "pumping" up the share price, before dumping their own shares at the expense of the investors, often causing substantial losses.
Companies that trade over-the-counter (OTC) are not as closely regulated as exchange-listed stocks and are subject to less stringent disclosure requirements. OTC companies do not have to meet the same level of disclosure with specific compliance and reporting requirements as companies that trade on the NASDAQ or NYSE exchanges. As a result, OTC stocks are difficult to research, making them risky investments. They are also usually less liquid, making them difficult to trade and subject to market manipulation.
Most retail investors have a better chance of making money with higher-quality stocks that have a larger capitalization than penny stocks. For example, buying and holding a low-cost index fund over the long term is a safer investment than putting the same amount in a handful of penny stocks over a five- or 10-year period. Generally, investing in penny stocks is best avoided unless you have experience with angel investing and researching startups.
Yes, penny stocks are hard to trade, as they are volatile and illiquid, which can have a negative impact on the bid-ask spreads and your ability to get into and out of your positions. Penny stocks are also hard to research, which further compounds the difficulties of making money trading them.
The cost of trading penny stocks depends on the online broker you use. If you use a broker that offers flat-fee trades instead of per-share rates, trading penny stocks is not expensive. We also recommend avoiding brokers that charge a monthly platform fee, data fees, or monthly minimums, as those costs quickly add up.
Example 2 (per share): Interactive Brokers charges $.0035 per share with a max cost of 0.5% of the trade value. You buy 20,000 shares of penny stock XYZ at a price of $.13 per share ($2,600). 20,000 shares x $.0035 per share is $70, while $2,600 x .5% is $13. Thus, your cost to buy the shares is $13 (0.5% of trade value).
If you want to know where to buy penny stocks or just want to do some research, you can use an online stockbroker; most offer penny stock trading. The best penny stock brokers in our analysis include the following:
For additional tools to find penny stocks to trade, you can start with a penny stock screener or market mover list. For example, Yahoo Finance's Trending Tickers and Small Cap Gainers pages both list companies that have jumped in price for the day. Ideal for day trading, the best time to trade momentum stocks is after the market opens at 9:30 a.m. Eastern.
Once you find the stock symbol you want to trade and create an order, you may need to fill out a questionnaire and accept a risk disclaimer related to the increased risk that comes with trading stocks that are not listed on a primary venue, such as the NYSE or NASDAQ.
When trading penny stocks, beginners often think they are getting "more for their money" because they can buy more shares in total. This is a myth. Stocks that trade for pennies are far more risky because they trade OTC and do not meet the strict financial requirements to be listed on a major stock exchange like the NASDAQ or NYSE.
Robinhood does not support trading OTC stocks. The only penny stocks supported by Robinhood are stocks that trade on either the NASDAQ or NYSE. If a company listed on the NASDAQ or NYSE trades below $1 for a certain period of time (or fails to meet other minimum financial metrics), it can be delisted and forced to trade OTC. As a result, OTC stocks are risky.
Our research team meticulously collects data on features with particular importance to penny stock traders, such as trading costs, availability of flat-fee trades, ease of platform and app use, and resources for researching a stock. In total, we evaluate nearly 200 variables for each broker.
It can often be the case that penny stocks do not have to file reports with the U.S. Securities and Exchange Commission, meaning stock market investors will have difficulty determining the overall financial health of a business.
Liquidity is also a concern. "In order to sell your penny stock that has appreciated by 1,000% you have to be able to find someone who is willing to pay that price for it, which is not likely to happen," says Joshua Simpson, investment advisor representative with Lake Advisory Group.
"The most infamous and popular scam with penny stocks is the 'pump and dump,' which was made popular by the mob decades ago," Simpson says. With this type of scam, the basic idea is that a person or group will drive up the price of a penny stock and then sell it after raising the price significantly.
Offshore brokers often use the informational blind spot that can come with penny stocks to pressure people with limited financial knowledge and investing experience into buying, enabling the broker to take advantage of higher-than-normal commissions, Simpson says.
One way to avoid scammers is to ignore social media conversation regrading penny stocks, Barr says. "There is likely some good information, but it's mixed and diluted with a lot of false or misleading information, and working to discern the difference is just too time consuming," he says.
A great way for beginners to trade in the penny stock market is to first get comfortable trading in simulation accounts, otherwise known as paper trading. This method is the safest way to practice trading penny stocks without the risk of losing real money. By becoming familiar with price fluctuation patterns and reflecting on the mistakes you made while using a mock account, you can learn the ins and outs of this market.
Penny stocks are highly speculative, and Simpson says there's no method for choosing the right one. People who aren't experienced investors that can afford to lose their money shouldn't invest in them, he adds.
"In my opinion, you would be better off taking the money you want to invest in penny stocks to the casino or horse track and betting it there," Simpson says. "At least that way you would be able to have a little fun with (the) money before it disappears."
"With a penny stock, investors will look for a new product, new idea, or a way to take something existing and do it better," Titus says. "Those with solid track records of solid performance over time will be listed on higher exchanges and likely have far less price volatility."
While there are differing views on price versus market cap, the bottom line is traders searching for penny stocks to buy are looking for cheap stocks. With that has come growing demand from millions of new traders investing in the stock market and the brokerages they choose to use.
When it comes to NASDAQ and NYSE penny stocks, the exchanges will require the companies to keep their prices above $1. In the event shares dip below that level, the exchange may end up delisting that penny stock, which would then trade on the OTC.
Making money with penny stocks is a sweet science but one that takes practice. These cheap stocks are highly volatile and, with that, very risky. But if you can make a living trading these stocks, what more could you ask for?
So if you really want to make trading penny stocks a usable skill, education is the first thing you should think about before placing a single trade. The fact is, flipping penny stocks is harder than most will admit.
You might remember the GameStop (NYSE: GME) explosion that occurred at the beginning of 2021. While this was in no way the first time social media had an impact on how stocks trade, it did set in motion a new trend for investors to use. As it relates to GME, many traders came together on Reddit, discussing a company that they had an emotional connection to. This led to hoards of people investing in the stock, and the price subsequently rose in the four-digit percentage range in a very short period.
For instance, when cannabis was legalized in Canada, most of the marijuana penny stocks broke out big. Not many attested that to their own news but rather the sector move in response to the big industry news. Sometimes, unusual or high-volume penny stock screeners can pick up on the groundswell before the average Joe investor puts the puzzle pieces together. 041b061a72