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. Many 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.

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?

thumb_up_off_alt ProsSmall companies are rarely followed by analysts and fund managers, which leaves opportunities for astute small investors.Their illiquidity may lead them to trade at a discount to their true value.thumb_down_off_alt ConsPenny stocks are often the targets for fraud and pump-and-dump scams.They often have wide bid-ask spreads, which makes them more expensive to exit.Little financial disclosure and regulatory oversight.

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?

Based on our analysis of top U.S. online brokers, these are the best brokers for penny stock trading: Fidelity Firstrade Charles Schwab E*TRADE TradeStation

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

March 19, 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 super duper 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.

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