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How to Invest in Penny Stocks

Sounds… cheap. Well, yes—penny stocks (also called micro-cap stocks) describe shares of a company that trade for low amounts, usually between $0.01 to $2.00. 

What is a Penny Stock?

Many institutions consider a penny stock to be anything that trades for less than $5.00 per share.

Despite their price, penny stocks equal 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).

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.

How Do I 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, first, 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 second 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.

Step 1: 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.

Step 2: Choose a broker

A little research online will net you quick results on which brokers are the best for penny stock aficionados. A bunch of online brokers charge extra for penny stock trades, which makes penny stocks mega-expensive.

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

Broker Best For Commissions Account Minimum Choose your platform
TradeStation
  • Advanced traders
  • Options and futures traders
  • Active stock traders
$0 $5,000 for individual retirement accounts (IRAs)
Get started securely through TradeStation's website
1 Minute Review

Founded in 1982 and headquartered in Plantation, Florida, Trade Station is apt for sophisticated traders. The firm offers free premium tools and real time data, charging no fees for software. ‘Amazing infrastructure’ and ‘innovative technology’ are the firm’s two selling points, which promise exceptional speed and reliability - a sine-qua-non for active and advanced traders. The firm also offers customized trading solutions for both international and domestic institutions.

Pros
  • Advanced trading platform
  • Vast amount of historical data that allows back-testing of trading ideas
  • Availability of many third-party add-ons
Cons
  • Less active traders are disadvantaged
  • No commission-free ETFs
Current Promotion

Open an account and save 20% on commissions.

TD Ameritrade
  • Beginner investors
  • Advanced traders
  • Investors who want portfolio-building advice.
$0 $6.95 for OTC Stocks $0
Get started securely through TD Ameritrade's website
1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Pros
  • Superior technology
  • No account minimum balance
  • Excellent customer support
  • Premier data and news partnerships
Cons
  • Slightly higher commissions
  • Can be for more advanced users
Current Promotion

Trade commission–free for 90 days & get up to $2500

eTrade
  • Mobile traders
  • Traders looking for research and data
  • Investors looking for retirement planning guidance
$0 $0
Get started securely through eTrade's website
1 Minute Review

E-Trade is best known for its user-friendly browser, desktop and mobile trading platforms and its extensive research and educational information. E-Trade may not have the lowest commissions compared to discount online brokers, but customers certainly get their money’s worth from E-Trade’s comprehensive offerings.

Pros
  • Extensive resources
  • Full banking services
  • Easy-to-use platforms
Cons
  • Limited access to ETrade Pro
  • Higher commissions than discount brokers
Current Promotion

60 days of commission-free trades with deposit of $10,000 or more

Step 3: Determine which stock to trade

A good starting point is to use tools that exist on the OTC Markets website or Finviz. 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.

Step 4: Begin trading

Be sure you’re comfortable with losing money on some (or potentially all) of your trades.

Step 5: Join a day trading chatroom

You’ll be able to learn a ton in a day trading chatroom. Even better, get a mentor who really knows a lot about trading the stock market. Be comfortable making mistakes. Nobody is a great trader right away.

A great overview of pennystocking can be found at www.timothysykes.com. (If you’re into penny stocks, you’ve heard of Tim Sykes, who, by the age of 21, turned $12,415 of his bar mitzvah money into $1.65 million by day trading penny stocks.)

Final Thoughts

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

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

Compare Online Brokers
Broker Commission Account Min Get Started

$0 $6.95 for OTC Stocks $0 Learn More

$0 $0 Learn More

$0 $0 Learn More

Free $0 Learn More

$0 $5,000 for individual retirement accounts (IRAs) Learn More