Penny stocks are stocks that trade at prices under $5 usually and are traded on the OTC or over-the-counter market. Unlike established corporations that trade on major stock exchanges, such as the NASDAQ and New York Stock Exchange, companies that trade on the OTC Bulletin Board are generally a lot smaller, often fledgling businesses.
Although many of these businesses will grow to feature on major exchanges, many will fail to reach those lofty heights. Because of the inherent risks of investing in these smaller companies, they tend to be a lot more volatile. As a result, penny stocks are not for the faint of heart. The lack of information around them and difficulty researching their financial statements and business condition mean they are generally appropriate for sophisticated investors who can afford to take the risks.
If you already have an established brokerage account with a diversified portfolio or your nest-egg is invested at a robo-advisor, and you are keen to invest some savings in penny stocks or you have a higher risk appetite than this guide to the best penny stock brokers should help you get started on the right path.
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How To Choose A Penny Stock Broker
If you have made the decision to trade penny stocks or your financial advisor has given you the green light to invest some “play money” then you should evaluate the best penny stock brokers that match your financial circumstances. This guide is intended to help you avoid some major pitfalls too. For example, some brokers will impose platform fees that cannot be waived. Others will quote trade fees that relate to a fixed quantity of shares and impose surcharges on each additional share purchased.
Here are some factors to consider when choosing penny stock brokers:
Pattern Day Trader Rule: Penny stock trading often involves more active trading than a classic buy-and-hold investment strategy. If you do need to trade actively, you may be subjected to the pattern day trader rule.
A pattern day trader is a day trader who buys and sells (or sells short and then buys to cover) the same security on the same day four or more times in five business days. To get around this rule, you may need to maintain a minimum equity balance of $25,000. Proficient penny stock traders will often deposit a slightly higher amount, such as $30,000, to give themselves a little cushion room.
Margin Account: Penny stock trading often involves more than simply buying stocks – it involves shorting stocks too. When shorting stocks, a margin account is needed and you will want a broker who has shares available to short.
Established brokers will generally have large clients, such as hedge funds, who engage in these transactions regularly and won’t be stumped by your trading request to short stock. Smaller brokers may not have the capability or specialization to short penny stocks, especially when share prices are very low, under $2 per share.
Flat Commissions Rates: Trading penny stocks usually involves transacting in large quantities of shares. Buying 1,000 shares of a $0.40 stock costs just $400, which is not enough to buy a single share of some established companies like Google.
Some brokers will impose surcharges on penny stock trading. For example, when a stock is below $2 per share, they might charge an additional penny per share in addition to their standard commission rate.
These surcharges might seem small but if you are trading 5,000 shares at a time, the transaction costs can add up in a hurry. To avoid trade surcharges, choose brokers with a flat commissions rate structure.
Online Trading Platform Execution: A good penny stock broker lets you buy and sell penny stocks using the same online trading platform that you can use to buy any other stock. Watch out for any broker who imposes a trading restriction on you that mandates you phone them to execute orders.
Trade Limits: A sneaky tactic imposed by some penny stock brokers that forces you to pay extra commissions is to limit the number of shares you can trade in each transaction. For example, if you wish to buy 12,000 shares of a penny stock but are restricted to a share volume limit of just 10,000 shares per transaction then you will need to pay an additional commission to buy the remaining 2,000 shares.
Good penny stock brokers do not impose such volume trading limits, which would otherwise cost you more in commissions and hinder your ability to execute fast orders.
Best Penny Stock Brokers For Costs
Interactive Brokers, Merrill Edge and Charles Schwab all cater to penny stock traders who are fee-conscious by providing low commissions costs. Interactive Brokers charges $0.005 per share in commissions based on a $1 minimum and caps commissions at 0.5% of the trade value.
Interactive Brokers is a good choice for international customers, traders looking to short shares, and fee-conscious penny stock traders. They may not have the highest ratings for customer service but Interactive Brokers serves hedge funds and wealthy individuals so they understand how important it is to make shares available to short and to execute orders accurately and fast. Interactive Brokers encourages active traders and stipulates a minimum monthly commissions rate of $10 plus a $10,000 account balance minimum.
Merrill Edge also serves the fee-savvy penny stock trader with a flat $6.95 commissions cost and no over-the counter surcharge fees. The FINRA day trading margin requirements of $25,000 are strictly imposed at Merrill Edge so if you don’t have the minimum you will be prohibited from transacting.
Best Overall Penny Stock Brokers
Charles Schwab and ETrade both charge flat commissions rates, though ETrade has a tiered structure that incentivizes active trading. Both brokers have an extensive range of penny stocks available for trading, and low account balance minimums.
Schwab and ETrade both make available a wide-ranging list of penny stocks that can be traded through their trading platforms. Where Schwab has the edge on commissions costs, ETrade comes out ahead on account minimums.
Both Charles Schwab and ETrade charge active traders a $4.95 flat rate for trading penny stocks. ETrade customers will pay a slightly higher amount of $6.95 if trading infrequently (fewer than 30 trades per quarter).
Schwab imposes a slightly higher account balance minimum of $1,000 on clients compared to the minimum $500 threshold imposed by ETrade.
Best Penny Stock Trading Platforms
Thinkorswim and TradeStation both have world class trading platforms. Inactivity fees are easily waived on TradeStation when trading penny stocks. Options traders who also want to trade the penny stock market will find thinkorswim more than adequately caters to their needs.
For the active trader seeking a trading platform that features comprehensive research, powerful analyzer tools, extensive screening capabilities and back-testing simulators, thinkorswim and TradeStation deliver.
TradeStation is attractive to penny stock traders because it waives its $99.95 monthly inactivity fee when you trade more than 5,000 shares monthly, a high hurdle when trading higher priced stocks but more manageable when trading penny stocks. Transaction fees are as low as $5 per trade plus you get all the bells and whistles of a top notch platform.
TradeStation has a trading platform capable of serving active penny stock traders and has the added bonus of an extensive tool suite to research more conventional stock trading opportunities. Another powerful trading platform is provided by thinkorswim, which caters to penny stock traders and specializes in options trading. Traders who want a world class options trading platform and the ability to trade penny stocks will find it hard to beat thinkorswim.
Penny Stock Broker & Trading Platform Summary
|Broker or Trading Platform||For Traders Who Are||Commissions||Account Minimum||Promotion||Open Account|
|Fee sensitive||$0.005 per share||$10,000||None unless under 25|
|Fee sensitive||$6.95 per trade||$25,000||Up to $600 cash bonus|
|Overall||$4.95 per trade||$1,000||Up to $500 cash bonus|
|Overall||$4.95 to $6.95 per trade||$500||60 days free commissions|
|thinkorswim®||Options traders & penny stock traders||$6.95 per trade||$0||Up to $600 cash bonus|
|Penny stock short sellers||$5 per trade||$5,000||20% off commissions|