As there are an increasing number of people interested in penny stocks, We thought we should put together a page talking about the best penny stock brokers. The list of suitable brokers used to be larger, but many brokers asked us to remove them from this page as they didn’t want penny stock clients.
E-Trade are a popular broker. Whilst they are a great stock broker, they also offer many other instruments such as forex, futures, options etc.
They have been around for over 30 years. Currently they charge as little as $4.95 per stock trade. There are also no extra fees for penny stocks.
Currently they have a fantastic promotion where you can trade FREE for 90 days. Also, if you deposit more than $10,000 you get an additional bonus of up to $2,500 depending on the amount you deposit.
Ally Invest (formerly Tradeking) have been around for more than 10 years now and are well known for being a low-cost broker. They aren’t one of the bigger players, but they have been steadily growing.
Trades are charged at a flat $4.95 each.
There is no minimum account size to worry about either. Other useful features including a busy forum, a great trading platform and decent customer service.
One of Tradestations strongest points is their trading platform. It is certainly the most indepth platform I have ever used. It’s free too. They also have very comprehensive historical data that can be really helpful when planning and testing your strategies.
Tradestation have also won major awards in recent years including the top award for “Best for Frequent Traders”.
What Are Penny Stocks?
Penny stocks – also known as micro-cap stocks(stocks with a market capitalization of $300 million or less) – are stocks that trade for less than a $1, according to the definition used by most traders. The Securities and Exchange Commission defines a penny stock as one trading below $5, but most traders use the $1 standard because it is less inclusive.
A penny stock is characterized by:
- Low market capitalization
- Low share price
- Relatively-low liquidity
- High volatility
- Relatively-low volume
What does all of that mean? For starters, penny stocks are cheap – very cheap. You can buy shares of a company for a penny. At that price, one thousand shares will cost only $10. Because of this, though, it can be hard to sell shares that you have because there aren’t as many traders interested in the stock as there are with other, more valuable stocks.
Part of this is because of where these stocks are traded, as we’ll talk about below. So, while you may get a thousand shares, there’s no guarantee you’ll be able to sell them when you want.
Plus, the price of penny stocks often fluctuates drastically. It’s not unusual to see wild upticks – and downticks – over the space of a trading day, just because these shares are so susceptible to trading (again, a product of low liquidity).
So, while penny stocks offer great upside potential for profit, they are also risky and prone to speculation. Caution should be used when trading these stocks; they’re not for beginners.
Once you’ve made the decision to try your hand at these particular assets, where do you go?
So How Do You Buy Penny Stocks Online?
You can actually find penny stocks on virtually all major exchanges, although rules vary on how long a micro-cap gets to stay listed on the exchange. The New York Stock Exchange, for example, delists a micro-cap stock if it trades below $1 for 30 consecutive trading sessions.
NASDAQ has a policy of delisting companies with a minimum bid price of below $5 for 30 consecutive trading sessions, and delists companies after 90 calendar days. For any stock listed on a major exchange, you can use one of the penny stock brokerages above.
Other places you can find penny stocks include:
- OTCBB: The OTC (Over-The-Counter) Bulletin Board is an electronic quoting system for buying and selling stocks outside of a formal exchange. This is a way to combine quotes from brokers and market makers operating over various electronic communication networks (ECN) in one location for investors to see. Penny stocks are commonly found here because they cannot meet the listing requirements for major exchanges.
- Pink Sheets: Similar to OTCBB, with even fewer filing requirements. This system is operated by a competitor to OTCBB, OTC Markets Group, Inc.
You can access OTCBB simply by going to its website. There, you can put in a symbol to find quotes just like with a major exchange, or can look through their lasting listings. Pink Sheets can be accessed through its website, and contains three tiers:
- OTCQX: This tier contains companies that meet certain standards and are reviewed by OTC Markets Group.
- OTCQB: This tier is for companies that are registered with the SEC or another banking regulator and regularly file reports. No financial standards are required to be met.
- OTC Pink: This is the least regulated tier of the three; many companies have little to no public disclosure.
Tips for Trading Penny Stocks
- The most important thing to do, by far, when buying penny stocks is to conduct thorough research. Research is everything because there isn’t usually a lot of information out there in plain sight about these companies.
- You have to dig a bit to find the financial data you need for an informed choice, and unless you are able to research and find info about earnings, EPS, P/E ratios, growth, and other key data, you’ll be in the dark.
- Take your time when choosing a broker for penny stocks, or any type of stock for that matter. Your broker can have a serious effect on your bottom line when trading.
- Also, keep in mind that trading penny stocks means dealing with assets that can be very illiquid. If there isn’t a lot of activity in the stock, you should look elsewhere first; while you may be able to buy, it’s not a guarantee that you’ll be able to sell your shares.
- The potential for big gains is there, but so is the potential for big losses. Exercise caution and do your research before trading.