How to Buy Penny Stocks

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Penny stocks (also called micro-cap stocks) describe shares of a company that trades for low amounts. These stocks are usually between $0.01 to $2.00. However, learning to buy penny stocks is more complicated than you might think.

Penny stocks sound cheap and are cheap, so new investors are often ready to leap in. The risk seems to be as low as the price. But the greatest gains in penny stocks grow over years, not days. Only the most patient investors will reap the rewards of this small investment.

Start with our guide to check out our top penny stocks and learn how to invest today. With a simple penny stock list some OTC trading knowledge, you can fill your portfolio with diversity that includes the best cheap stocks to buy.

Quick Look at How to Buy Penny Stocks:

• Spot Potential Gems: Scout for penny stocks with growth potential through thorough market research.
• Secure a Trading Platform: Opt for a brokerage that accommodates penny stock trading, ensuring it aligns with your investment goals.
• Open Your Investment Hub: Kick off your journey by setting up an account with your chosen brokerage and funding it adequately.
• Define Your Investment Threshold: Establish a clear budget, delineating the amount you're comfortable allocating to penny stocks.
• Dig Deep: Dive into the nitty-gritty of each penny stock under your radar, conducting due diligence to unveil their underlying strengths and risks.
• Execute Your Strategy: With insights gained, take action by placing buy orders for the penny stocks you've singled out as promising prospects.
• Stay Vigilant: Keep a watchful eye on your penny stock portfolio, as volatility is often part and parcel of this investment terrain.
• Manage Risk Wisely: Implement risk-mitigation measures such as stop-loss orders to safeguard your investments against unforeseen downturns.
• Stay in the Know: Remain abreast of market developments and news pertinent to your penny stocks, ensuring informed decision-making.
• Fine-Tune Your Approach: Continuously reassess and adjust your investment strategy based on performance and evolving market conditions.

What is a Penny Stock?

Many institutions consider a penny stock to be anything that trades for less than $5.00 per share. At times, you are counting the value of the stock in mills, but remember, the same thing is true of certain cryptocurrencies. You can make a profit, but you must invest carefully.

Despite their price, penny stocks carry a bigger risk than regular stocks. The reason for inflated risk is simple. The companies that hold penny stock typically have no profits and minimal operations. They usually trade on the pink sheets or on FINRA’s over-the-counter bulletin board (OTCBB). They are not required to file with the Securities and Exchange Commission (SEC).

Even though penny stocks under 10 cents look enticing, investing isn’t like going to the store. Value investing involves stocks that can grow—not just stocks that are cheap. Learn how to purchase penny stocks for the sake of diversity, not savings.

These stocks have low liquidity due to a lack of buyers and sellers, so orders may not be filled right away or even at all. In addition, volatility tends to be high among OTC stocks, and bid-ask spreads are frequently large.

People tend to be lured into penny stocks due to their cheap cost and the simple math of this type of stocks. That is, if you buy shares for $0.20, and if the stock goes up by $0.10, then your profit is at 50%. However, it’s just as easy, and likely, for your $0.20 share to go down by $0.10 and lose 50%.

Therefore, a $1,000 investment could lose value pretty quickly. Even if you buy penny stocks wisely, you are juggling several more risk factors than you do with other investments.

How to Invest in Penny Stocks

Okay, you’ve listened to the warnings, yet you still want to trade penny stocks. Now, it’s still possible to trade penny stocks successfully. However, 1st, you need to learn. Then, you trade.

You must be an educated investor who understands the market to successfully trade penny stocks. If you trade penny stocks successfully, they really can offer the greatest risk-reward ratio of any investment type.

The 2nd thing you must do is stay away from scammers. Read the fine print on any email or ad you see on social media and in emails. “Pennies to dollars instantly” is a great lead-in to a major source of pain—for you.

You might find an OTC stocks list that intrigues you, or a colleague might recommend pink sheet stocks due to their low value. On the one hand, you might have found a quality investment. On the other hand, OTCMKTS stocks can be lethal.

Do Your Research

Make sure the penny stock companies you’re interested in are legitimate. Do your due diligence and look into companies before throwing a few hundred dollars at their cheap shares.

You can go to the Securities and Exchange Commission (SEC) website to see if the stock has been recently delisted from a major exchange. You can also get copies of the company's most recent SEC filing to get an idea of the company's overall financial health.

It's important to understand how the company makes money. A stock screener can help you filter stocks based on criteria like price per share. From there, you can dig into a company more individually. Research does require additional time, but it increases your odds of success.

Choose a Broker

A little research online will net you quick results on which brokers are the best for penny stock aficionados. If you don’t know where to trade penny stocks, it might help to find a broker that allows you to manage your entire portfolio.

A bunch of online brokers charge extra for penny stock trades, which makes penny stocks mega-expensive. Purchase penny stocks with a broker that helps you save money and make the process simpler.

You’ll want to find the best penny stock brokers who don’t include extra surcharges on these types of. A couple of brokerages that surfaced were TD Ameritrade and TradeStation, which charge nothing in surcharges. Per penny stock transaction, TD Ameritrade charges $6.95 and TradeStation charges $5.

It’s also worth it to know that TD Ameritrade doesn’t have a surcharge on large orders—around 1,000 shares or more. Watch out, a lot of brokers enact a surcharge on those large orders. In addition, some also require you to trade penny stocks by imposing limits on the types of trades you can execute.

Determine Which Stock to Trade

A good starting point is to use tools that exist on the OTC Markets website. Also, know that the OTC Markets Group organizes securities into tiered marketplaces that can help you determine which stocks to trade—which may help you determine potential success with your trades.

Begin Trading Penny Stocks

Be sure you’re comfortable with losing money on some (or potentially all) of your trades. Can you short penny stocks, too? Yes, if your broker allows it.

Creating a Trading Strategy for Penny Stocks

Take a look at our list of penny stocks—both gainers and losers. Both tables update continually, so you can stay up-to-date on the best penny stocks. On the one hand, you might uncover an OTC stock. However, you might find cheap stocks that sit on major indices. As a result, you must be aware of how close a stock is to begin delisting. You don’t want to lose your investment because the stock fell off the index.

As you learn how to trade penny stocks, you must remain diligent. Never invest in something you don’t understand, and never assume that penny stock trading will result in a profit. Some penny stocks rise to $100 per share, and others don’t.

Plus, penny stock brokers are assuming that you know what you are looking at. A free penny stock trading app operates similarly to a major brokerage. So, searching “how to buy penny stocks on Robinhood” will return a process that’s no different from a free app.

Take the Risk?

Tim Sykes has been asked the question, “Aren’t penny stocks dangerous?” He answers, “Yes. And life is dangerous.”

Whether you want to learn how to buy penny stocks on Fidelity, where to buy OTC stocks or find a simple penny stock exchange, you are still taking a risk. Why?

Penny stocks do not receive the same level of scrutiny as stocks traded on the NYSE or NASDAQ. Hence, they can fly under the radar, and any information you find about them may not come from a reliable source. While your research time doubles, the value of the stock remains relatively low. If you cannot sell the stock for a quick profit just after it rises in value, you may not be able to sell it at all. Therefore, you buy penny stocks at your own risk because there is no way (currently) to judge the market for such a cheap stock. It could go viral overnight, it could level out or the company could go bankrupt tomorrow.

Moreover, penny stocks are traditionally offered by companies with little to no history. You cannot research a stock that no one knows anything about, and you cannot compare its movement to non-existent data. While we love diversifying our investments, there comes a time when you must let certain penny stocks fall by the wayside because you cannot make a fully-informed choice.

Ultimately, educated and disciplined individuals can make money on penny stocks—but it takes training, a mentor and a major willingness to take on risk while avoiding certain dangers that cannot be overcome.

When you learn how to buy OTC stocks, you must also consider a common question, “how much does it cost to make a penny?” If you’re not careful, the figure is higher than you think.

Get started with your research and our list of the best penny stocks today.

Ready to start trading penny stocks? Check out the best penny stocks you can invest in right now.

Frequently Asked Questions