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Penny stocks (also called micro-cap stocks) describe shares of a company that trade for low amounts. These stocks 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.
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What is a Penny Stock?
Many institutions consider a penny stock to be anything that trades for less than $5.00 per share. While penny stocks can reach a reasonable value, you might also stocks under a penny. 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
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.
Benzinga’s Recommended Stock Brokers
Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.
Webull is widely considered one of the best Robinhood alternatives.
- Active traders
- Intermediate traders
- Advanced traders
- No account maintenance fees or software platform fees
- No charges to open and maintain an account
- Intuitive trading platform with technical and fundamental analysis tools
- Does not support trading in mutual funds, bonds or OTC stocks
Moomoo is a commission-free mobile trading app available on Apple, Google and Windows devices. A subsidiary of Futu Holdings Ltd., it’s backed by venture capital affiliates of Matrix, Sequoia, and Tencent (NASDAQ: FUTU). Securities offered by Futu Inc., regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Moomoo is another great alternative for Robinhood. This is an outstanding trading platform if you want to dive deep into smart trading. It offers impressive trading tools and opportunities for both new and advanced traders, including advanced charting, pre and post-market trading, international trading, research and analysis tools, and most popular of all, free Level 2 quotes.
Get started right away by downloading Moomoo to your phone, tablet or another mobile device.
- Cost-conscious traders
- Active and Advanced traders
- Over 8,000 different stocks that can be sold short
- Access trading and quotes in pre-market (4 a.m. to 9:30 a.m. ET) and post-market hours (4 p.m. to 8 p.m. ET)
- No minimum deposit to open an account.
- No chat support
This latest groundbreaking technology is IBKR GlobalAnalyst, a new trading tool that helps investors compare the rate of PEG or price-earnings growth valuations and provide more immediate and comprehensive financial metrics of stocks, globally.
Recognizing that stock selection can be challenging for investors to compare the valuations of domestic and international stocks, Interactive Brokers created GlobalAnalyst to offer investors a simple, yet powerful tool to easily evaluate investment opportunities around the world.
Using GlobalAnalyst, investors can search for stocks by region, country, industry, market capitalization and currency to uncover undervalued stocks worldwide. The resulting table displays the current market and financial metrics, including the PEG Ratio. The PEG Ratio is the PE ratio divided by the three-year compound earnings growth rate, and smaller PEG Ratios typically indicate undervalued companies.
- Price earnings growth valuations
- Easily evaluate investment opportunities
CenterPoint Securities is ideal for active traders who demand access to advanced tools and services. While investors and casual traders are likely to be content with the basic offerings of traditional online brokerages, active traders will benefit from CenterPoint’s suite of advanced trading tools. If you value execution quality, access to short inventory, advanced trading platforms, and accessible customer service, CenterPoint is an excellent choice.
- Intermediate to Advanced traders
- High-volume traders
- Momentum traders
- Short sellers
- Unrivaled access to short inventory
- Flexible order routing for improved executions
- Discounts for active traders
- Advanced platform with fast executions
- Reliable customer service
- Not designed for beginner or low-volume traders
A List of 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 delisted. 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.
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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
How much do I need to start trading penny stocks?
FINRA sets a requirement of $25,000 in your brokerage account to begin, but there are other online brokerages that allow you to trade with a lower minimum. Check with your penny stocks app or broker to learn more.
Are penny stocks risky?
Investing in penny stocks is risky with businesses that have no revenues, low growth prospects and there is a risk of default.
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