What are penny stocks?

I think of penny stocks as microcap companies with prices under $5 that only trade over the counter. That said, 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. Many trade for pennies per share (less than $1).

What’s the difference between penny stocks and OTC (over-the-counter) stocks?

There isn’t a universally accepted definition for penny stocks, but a popular definition is an over-the-counter stock that trades for $5 or less per share. Penny stocks are considered riskier than higher-priced OTC stocks because they are most likely cheap for good reasons, including failed business models, distressed financials or simply falling out of favor in the stock market. Over-the-counter stocks trade between stock dealers instead of a stock exchange. OTC Markets Group has three tiers that each have different listing requirements, with OTCQX stocks meeting the most stringent requirements. OTCQB stocks are subject to less demanding standards and OTC Pink (named from the printed pink sheets the quotes used to be printed on) has the most lax standards.

What are the pros and cons of trading penny stocks?

One of the key advantages of trading penny stocks is the potential for finding undervalued opportunities. Since small companies are rarely followed by major analysts or institutional investors, astute individual traders can identify stocks that may be overlooked. I’ve seen cases where the illiquidity of these stocks means they trade at a discount to their true value, giving savvy investors a chance to capitalize on price inefficiencies. For those willing to research and take on some risk, penny stocks offer the allure of high returns from small investments. However, penny stocks come with significant risks. They’re often targeted by fraudulent schemes, such as pump-and-dump scams, which can result in substantial losses for unsuspecting investors. In my experience, the wide bid-ask spreads typical of penny stocks make exiting a position more expensive, cutting into potential profits. Additionally, these companies usually provide limited financial disclosure and face less regulatory oversight, which means traders often lack the reliable information needed to make informed decisions.

How much does it cost to trade penny stocks?

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; some brokers even extend their free stock trading policy to include penny stocks. 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): Charles Schwab 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).

How do you buy penny stocks?

For beginners who want to buy penny stocks, the following checklist can help improve your experience buying and trading. Choose a reputable broker: Pick a trustworthy firm to open an online brokerage account. 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. 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.

Who is the best penny stock broker?

The best penny stock broker is Fidelity due to its zero-commission OTC trades and exceptional order execution. Unlike many brokers that charge additional fees for penny stocks, Fidelity allows you to trade these low-priced shares without hidden costs, which is crucial for minimizing expenses in the volatile penny stock market. I’ve found that Fidelity also offers some of the best price improvement in the industry, often securing better fills for your trades, a significant advantage when every cent counts in penny stock trading. With its first-rate research tools and technical analysis capabilities, Fidelity is my top choice for traders looking to succeed in penny stocks.

Best Brokers for Penny Stock Trading of 2024

Written by Sam Levine, CFA, CMT
Edited by Carolyn Kimball
Fact-checked by Steven Hatzakis
Reviewed by Blain Reinkensmeyer

October 21, 2024

Penny stocks are shares that trade for under $5 and trade over the counter, or OTC, though there’s not really an industry-wide definition for them. Penny stocks are extremely risky. They’re often illiquid — meaning difficult to quickly convert into cash — and have loose financial disclosure requirements, which makes them subject to scams and market manipulation. Their low prices, however, can tempt some investors with the possibility of very high returns.

Just in case you are feeling that speculator vibe, I researched which brokers are best for buying cheap OTC stocks by comparing the pricing and trading platforms of 17 online brokers in the U.S. I'll walk you through each of my top picks and explain what makes each one a good deal for penny stocks and provide some answers to burning questions about this market.

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