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Best Brokers for Penny Stocks Trading in 2019

Blain Reinkensmeyer

The StockBrokers.com best online brokers 2019 review (9th annual) took six months to complete and produced over 30,000 words of research. Here's how we tested.

Penny stocks, companies whose shares trade for under $1, are risky investments. The vast majority of time, companies trade for pennies per share because of poor financial metrics, which results in an uncertain future and more risk.

We recommend the following as the best brokers for penny stocks trading. None of these brokers charge any additional fees associated with stocks less than $1. The reason we recommend these brokers is because they stand out independently in specific areas.

What are penny stocks?

According the US Securities and Exchange Commission (SEC), "The term 'penny stock' generally refers to a security issued by a very small company that trades at less than $5 per share." For everyday investors, the best way to think of penny stocks is to think of stocks that trade for (literally) pennies per share.

Best Online Brokers for Trading Penny Stocks

Here are the best brokers for trading penny stocks, based on 29 variables.

  • TD Ameritrade - $6.95 per trade
  • Fidelity - $4.95 per trade
  • Charles Schwab - $4.95 per trade
  • Interactive Brokers - $.005 per share
  • TradeStation - $5 per trade
TD Ameritrade

$6.95 per trade - Open Account
Exclusive Offer: Trade free for 90 days + get up to $600 cash.

Trading penny stocks with TD Ameritrade is a great experience because the broker charges a flat-fee $6.95 for stock trades and offers the most comprehensive selection of trading tools through the thinkorswim trading platform. Alongside being our top pick for penny stocks, TD Ameritrade also finished No. 1 overall in our 2019 Review. Read full review

Fidelity

$4.95 per trade - Open Account
Exclusive Offer: Get 300 commission-free trades and 2 years to use them.

Fidelity offers flat-fee penny stock trades as well as its Active Trader Pro desktop platform, which like thinkorswim, is full of trading tools. While TD Ameritrade has the edge in trading tools and features, Fidelity has the edge with performing research on penny stock companies, thanks to its easy to use stock research area. Read full review

Charles Schwab

$4.95 per trade - Open Account
Current Offer: $4.95 online equity trades + $0.65 per options contract.

Charles Schwab charges no additional fees for trading stocks under $1 and offers a balanced selection of stock research. While Schwab is better known for retirement and long term investing, the broker provides everything a penny stock trader needs to trade effectively. Read full review

Interactive Brokers

$.005 per share - Open Account
Exclusive Offer: New clients that open an account today receive a special margin rate.

While Interactive Brokers can be expensive for trading penny stocks since the broker charges a per share rate, Interactive Brokers offers excellent direct market routing options and the most order types of any online broker we've tested. Interactive Brokers also offers a larger selection of penny stocks to short compared to TD Ameritrade, Fidelity, and Schwab. Read full review

TradeStation

$5 per trade - Open Account
Promo Offer: $5 per Trade plus $0.50 per Contract for Options

If using TradeStation for trading stocks under $1, the best route to go is the flat-fee pricing plan, which is the default pricing plan offered by TradeStation. In the vast majority of cases, trading on a per share basis would be too expensive for penny stocks. TradeStation won our award for best trading technology and offers a terrific trading platform that is loaded with great tools. Read full review

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How to calculate penny stock trading costs

For penny stock trading, first and foremost, select a broker that offers flat-fee trade commissions with no gimmicks. Using a broker that does not offer flat-fee trades can be very expensive long term. Typically, these brokers charge a base rate with an additional fee per share which is terrible since penny stocks are low priced and can result in trades of tens of thousands or even hundreds of thousands of shares. Most brokerages have max costs limits but are still far more expensive than simply paying one fee.

Cost Example 1:

TD Ameritrade charges a flat-rate $6.95 per trade. You buy $5,000 worth of penny stock XYZ at a price of $.13 per share, totaling 38,461 shares (5,000 / .13). Your cost to buy the shares is then $6.95.

Cost Example 2:

Interactive Brokers charges $.005 per share with a max cost of 0.5% of the trade value. You buy $5,000 worth of penny stock XYZ at a price of $.13 per share, totaling 38,461 shares (5,000 / .13). Your cost to buy the shares is then $25 ($192.31 using per-share method or $25 cap, thus capped at 0.5% of trade value).

FeatureTD AmeritradeFidelity Charles SchwabInteractive BrokersE*TRADE
Minimum Deposit$0.00$0.00$0.00$0.00$500.00
Stock Trade Fee (per trade)$6.95$4.95$4.95N/A$6.95
OTCBB / Pink Sheets Yes Yes Yes Yes Yes
Research - Pink Sheets / OTCBB Yes Yes Yes Yes Yes
Paper Trading Yes No No Yes Yes
Overall 4.5 4.5 4 4 4

How to buy penny stocks

Penny stocks typically trade Over the Counter (OTC), meaning they are not listed on a formal exchange like the NASDAQ. Instead, they are instead listed as a Pink Sheet or trade on the OTC Bulletin Boards (OTCBB). If a company listed on the NASDAQ trades below $1 for a certain period of time (or fails to meet other quality metrics), the company can be delisted and forced to convert to a OTCBB or Pink Sheet listed security.

td ameritrade penny stock order page

That said, not all companies that trade OTC are penny stocks. Some are legitimate companies growing their business with the goal of one day being listed on a major exchange such as the NASDAQ or NYSE. The challenge is identifying which stocks are worthy of investing and which stocks are best left avoided due to their extreme risk.

Penny stock risks

Here are five important tips to remember when buying penny stocks:

  • They are risky - Penny stocks trade for less than $1 per share for a reason.
  • Be aware of fraud - Watch out for pump and dump schemes.
  • Be aware of paid promotions - Ignore emails claiming amazing returns, they are fake.
  • Do your own research - Research the company before you buy.
  • Be aware of costs - Select a broker with flat-fee trades.

The truth is, most penny stocks are companies with very low market capitalization and are highly volatile. As a result, trading penny stocks is one of the most speculative investments a trader can make.

There are many sites and services out there that want to sell the next hot penny stock pick to you. So before buying penny stocks, consider the following dangers.

Manipulation of Prices. Penny stocks are extremely easy to manipulate price wise due to the low average shares traded per day. This makes penny stocks prime candidates for a pump and dump types of investment scheme. Very often on message boards, in emails, newsletters, etc. pumping (or promotion) of a penny stock can be seen to attract investor capital. Once the stock jumps in price, the promoter/s sells out completely, with tanks the stock price and leaves the remaining investors with significant losses.

Unregulated exchanges. Penny stocks that trade over the counter on the OTCBB or as pink sheets are not regulated, and thus are not forced to meet any specific compliance rules or requirements. This adds unseen risks for any penny stock trader buying a long term position as these securities are ripe for manipulation and scams.

Lack of financial statements. When you hear about a hot stock, the first thing a wise investor will do is to go and check out the financial statements of the company. Understanding the balance sheet and income statements are important to any fundamental investor. Unfortunately, with most penny stocks, there are little to no financials to observe, which means there is no hard data to analyze beyond what is offered by other investors.

Lack of liquidity. While not the case with all penny stocks, most are not liquid. For example, some stocks may only see $10,000 - $50,000 in share value exchanged per day. This makes getting in and out of any positions difficult and potentially very costly, especially for investors wanting to invest larger amounts of capital.

How to avoid penny stocks fraud

Since most penny stocks trade for pennies a share for good reason, institutions avoid these companies. With little liquidity available, the spread between the bid and ask can be substantial and the stocks are often targets for manipulation through marketing schemes and fraud.

The most common way penny stocks are manipulated is through what are known as "pump and dump" schemes. The company will pay penny stock promoters to blast hundreds of thousands of emails and post on social message boards fake news and falsified information about the company to generate excitement and encourage unknowing investors to buy. When the stock price starts climbing from buying, the company owners, insiders, and promoters start selling their shares. Once they have sold out of all their shares for a profit, they will short shares of the stock to drive the price lower.

Common penny stock myths

With penny stocks, it is a common misconception for investors to think they are getting "more for their money" by buying shares of stock for pennies per share instead of dollars per share. This is completely false. Stocks that trade for pennies are actually much more risky, as highlighted above, and stocks that trade for $10, $50, $100, or higher per share are companies with financials strong enough to support institutional ownership alongside, more importantly, a listing on a major stock exchange such as the NYSE.

While the risks associated with trading penny stock trading are high, investors can make money, which is why they are still traded each and every day. Retail investors will forever be attracted to cheaper share prices alongside the dream of buying a stock for pennies a share and watching it surge to dollars per share, yielding dramatic returns. Sadly, this is very rarely the outcome for penny stocks. Instead, the majority end of up eventually going bankrupt and shareholders lose everything.

What are pink sheets?

Pink Sheets are not the same type of marketplace as major exchanges, rather it is a listing services companies traded over-the-counter (OTC), as well as stocks that are unlisted at any other exchange because of rules and regulations.

Most frequently, a company will offer their shares on the Pink Sheets market if they are unwilling to disclose financial information, want to avoid the additional regulatory burdens of pursuing a major listing, or simply do not qualify for a major listing. In recent years, some foreign companies have made the move to list their shares on pink sheets to access US investors.

What is the over-the-counter bulletin board (OTCBB)?

The OTCBB is an electronic quotation system that displays real-time quotes, sale prices, and volume information for thousands of over-the-counter securities that are not listed on the NASDAQ or the NYSE.

Companies who go public on the OTCBB must adhere to the Sarbanes-Oxley Bill, and they must be audited on a yearly basis. In general, stocks that trade on the OTCBB are typically penny stocks and the bid/ask spread can be quite large because of the low volume. Needless to say, they are very risk investments.

Pink Sheets vs OTCBB comparison

Let's compare both listing venues side by side and surface the high-level takeaways.

Pink Sheets and OTCBB Similarities

  • Both require a company to have at least 35 shareholders to be listed.
  • There are no minimum revenue or asset requirements for companies listed.
  • Both require a company to be audited by registered accountant before they are initially listed.

Pink Sheets and OTCBB Major Differences

  • A company listed on the OTCBB is required to file a quarterly financial report with the SEC, while companies on Pink Sheets are not required to report financial statements at all.
  • Companies who trade on the Pink Sheets are not required to adhere by the Sarbanes-Oxley Bill, while those on the OTCBB are.
  • Companies who list on the OTCBB generally do so because of the extra prestige, while those who choose to list on the Pink Sheets generally do so because of the lower costs.

All in all, any stock that trades on the Pink Sheets or the OTCBB is a very risky stock. Because Pink Sheets don’t have any financial reporting rules, it is very difficult to quantify how a company is doing. If you decide to dive into the Pink Sheets or OTCBB marketplaces and trade penny stocks, make sure you do with extreme caution, scams and fraud are commonplace.

Best Brokers for Trading Penny Stocks (Summary)


Online Broker Trading Platform Minimum Deposit Commissions Overall Rating
TD Ameritrade thinkorswim $0 $6.95 4.5 Stars
Fidelity Active Trader Pro $0 $4.95 4.5 Stars
Charles Schwab StreetSmart Edge $0 $4.95 4 Stars
Interactive Brokers Trader Workstation (TWS) $0 $0.005 per share 4 Stars
TradeStation TradeStation 10 $500 $5.00 4 Stars

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Methodology

For the StockBrokers.com ninth annual best online brokers review published in February 2019, a total of 4,544 data points were collected over six months and used to score brokers. This makes StockBrokers.com home to the largest independent database on the web covering the online broker industry.

Participation is required to be included. Each broker completed an in-depth data profile and provided executive time (live in person or over the web) for an annual update meeting. Our rigorous data validation process yields an error rate of less than .001% each year, providing site visitors quality data they can trust. Learn more about how we test.

Still aren't sure which broker to choose? Ask us a question! Whether you are a beginner investor learning the ropes or a professional trader, we are here to help. Email us your online broker specific question and we will respond within one business day. It is our satisfaction guarantee.

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Blain Reinkensmeyer

About the author: Blain Reinkensmeyer As Head of Research at StockBrokers.com, Blain Reinkensmeyer has 18 years of trading experience with over 1,000 trades placed during that time. Referenced as a leading expert on the US online brokerage industry, Blain has been quoted in The New York Times, Forbes, and the Chicago Tribune, among others.


All pricing data was obtained from a published web site as of 02/18/2019 and is believed to be accurate, but is not guaranteed. For stock trade rates, advertised pricing is for a standard order size of 500 shares of stock priced at $30 per share. For options orders, an options regulatory fee per contract may apply.

TD Ameritrade, Inc. and StockBrokers.com are separate, unaffiliated companies and are not responsible for each other’s services and products. View terms.

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