5 Best Brokers for Penny Stock Trading 2023 (2024)

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.

An OTC broker can execute trades of unlisted securities through the “over-the-counter” market. The most popular stocks trade on stock exchanges, and any stockbroker can trade a stock listed on an exchange. But some stocks can also be traded away from an exchange through the OTC market, which consists of broker-dealers who trade directly with each other. You should be very wary of a penny stock broker that only offers penny stocks.

You need a brokerage account, but you don’t need the advice of a commissioned stockbroker on which ones to buy or how to buy penny stocks. Brokerage firms act as agents to buy shares on your behalf from any shareholders willing to sell their shares. Brokerages also maintain account records and report required information to the government and other market regulators.

Based on our analysis of top U.S. online brokers, these are the best brokers for penny stock trading:

• Fidelity
• Firstrade
• TradeStation
• TD Ameritrade
• E*TRADE

No. It's perfectly legal to trade penny stocks — or any listed security — with a regulated broker. However, it is illegal to do so with any non-public data (also known as insider information), and penny stocks are more susceptible to insider trading and market manipulation than larger-cap companies.

As an example of the risks involved, penny stocks are often targeted for so-called pump-and-dump schemes. Promoters of such schemes lure in investors with the goal of driving up the share price, before dumping their shares and leaving other shareholders with big losses.

Investing in penny stocks shouldn't be entered into without some forethought. Here are five tips to remember when buying penny stocks:

• They are risky. Penny stocks trade for less than $1 per share for a reason.
• Be wary of fraud. Watch out for pump and dump schemes.
• Be mindful of paid promotions. Ignore emails claiming big returns. They are most likely scams.
• Do your own homework. Thoroughly research the company before you buy.
• Be aware of costs. Select a broker with flat-fee or $0 trades.

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.

Yes, you can make money on penny stocks, just as you can with any stock. Penny stocks carry more risk because they are less liquid and often the target of investing scams. Do careful research before investing in a penny stock.

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 1 (flat-fee): TD Ameritrade charges a flat-rate $6.95 per OTC trade, while Fidelity charges $0 (no charge). Thus, your cost to buy OTC shares is just $6.95 and $0, respectively.

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).

There is no government-mandated minimum to buy penny stocks, and many U.S. brokers do not have account minimums to open an account or execute a trade. Some brokers, however, may not permit penny stock trading as a matter of policy or because you do not meet that broker’s financial requirements.

You might get rich off penny stocks, but it’s very unlikely. There’s a reason why U.S. regulators discourage investors from investing in them. The majority of investors who trade penny stocks lose money and most success stories come from social media, where profit claims are unaudited.

Penny stock scammers will advertise guaranteed or low-risk profits as a way to lure beginner traders into paying for expensive monthly subscriptions or lessons. Chat rooms, newsletters, and live streams are typical subscription offerings that beginners should review with great caution to avoid scams.

For beginners who want to buy penny stocks, the following checklist can help improve your experience buying and trading.

1. Choose a reputable broker: Pick a trustworthy firm to open an online brokerage account.
2. Analyze details: Research the penny stocks you are considering as much as possible, which will probably be difficult given the lack of reporting required by OTC exchanges.
3. Don’t get scammed: Avoid penny stocks that are susceptible to market manipulation such as those targeted by "pump-and-dump" schemes, or that you may have heard about on online forums and in chat groups.

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:

• Fidelity
• Firstrade
• TradeStation
• TD Ameritrade
• E*TRADE

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.

Based on our research and analysis, here are the best mobile trading apps for buying OTC stocks:

• Fidelity
• Firstrade
• TradeStation
• TD Ameritrade
• E*TRADE

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.

Best brokers for penny stocks gallery

Since most penny stocks have a low number of shares traded each day (low liquidity), prices are easy to manipulate. This makes penny stocks prime candidates for pump and dump investment schemes.

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.