how to find penny stocks

The StockBrokers.com best online brokers 2021 review (11th annual) took three months to complete and produced over 40,000 words of research. Here's how we tested.

Penny stocks are companies whose shares trade for under $1. Penny stocks are risky investments, as in most cases they trade over-the-counter (OTC), which means the companies are too small and unprofitable to trade on a major exchange like the NASDAQ or NYSE.

To help investors find the best brokers for penny stocks trading, we compared the pricing and trading platforms of 11 brokers. Our top pick for 2021, TD Ameritrade, combines flat-rate pricing with excellent trading tools and research capabilities.

What are penny stocks?

According to the US Securities and Exchange Commission (SEC), "The term 'penny stock' generally refers to a security issued by a very small company (i.e., micro-cap) that trades at less than $5 per share." The most common penny stocks are companies that trade for pennies per share (less than $1).

Best Online Brokers for Trading Penny Stocks

Here are the best brokers for trading penny stocks, based on 29 variables.

Fidelity - $0 per trade
TD Ameritrade - $6.95 per OTCBB trade
Charles Schwab - $6.95 per OTCBB trade
TradeStation - $0 per trade (up to 10,000 shares)
Interactive Brokers - $.0035 per share

Is it a good idea to buy penny stocks?

Here are five tips to remember when buying penny stocks:

They are risky - Penny stocks trade for less than $1 per share for a reason.
Be aware of fraud - Watch out for pump and dump schemes.
Be mindful of paid promotions - Ignore emails claiming big returns; they are a scam.
Do your own research - Thoroughly research the company before you buy.
Be aware of costs - Select a broker with flat-fee trades.

Why are OTC stocks risky?

Companies that trade over-the-counter (OTC) are not regulated and are subject to less stringent disclosure requirements. OTC companies do not have to meet the same level of disclosure with specific compliance and reporting requirements as companies that trade on the NASDAQ or NYSE exchange. As a result, OTC stocks are difficult to research, making them risky investments.

Is it illegal to buy penny stocks?

No. It's perfectly legal to trade penny stocks — or any listed security — with a regulated broker. However, it is illegal to do so with any non-public data (also known as insider information), and penny stocks are more susceptible to insider trading and market manipulation than larger-cap companies.

As an example of the risks involved, penny stocks are often targeted for so-called pump and dump schemes. Promoters of such schemes will lure in investors with the goal of "pumping" up the share price, before dumping their own shares at the expense of the investors, often causing substantial losses.

Buying or selling stocks using insider information is a serious federal crime that carries a maximum sentence of 20 years and fines ranging from $5 million for individuals to up to $25 million for corporate entities.

Can you make money with penny stocks?

Yes, but sophisticated investors such as institutions and funds avoid investing in micro-cap (penny stock) companies, because investing in penny stocks can be more of a gamble — and is thus best avoided unless you have experience angel investing and researching startups.

On average most retail investors will have a higher chance of making money over the long term with better quality (blue chip) stocks that have higher capitalization than penny stocks. For example, a low-cost index fund over the long term will be a less risky investment than putting the same amount in a handful of penny stocks over a five or 10-year period.

Whether penny stocks should be included in your portfolio should depend entirely on your financial goals. It's important to assess your risk tolerance, and the percentage of your portfolio that you want to budget for such extremely speculative trades.

How much does it cost to trade penny stocks?

The cost of trading penny stocks depends on the online broker you use. If you use a broker that offers flat-fee trades instead of per-share rates, trading penny stocks is not expensive. We also recommend avoiding brokers that charge a monthly platform fee, data fees, or monthly minimums, as those costs quickly add up.

Example 1 (flat-fee): TD Ameritrade charges a flat-rate $6.95 per OTC trade, while Fidelity charges $0 (no charge). Thus, your cost to buy OTC shares is just $6.95 and $0, respectively.

Example 2 (per share): Interactive Brokers charges $.0035 per share with a max cost of 0.5% of the trade value. You buy 20,000 shares of penny stock XYZ at a price of $.13 per share ($2,600). 20,000 shares x $.0035 per share is $70, while $2,600 x .5% is $13. Thus, your cost to buy the shares is $13 (0.5% of trade value).

Can you get rich off penny stocks?

No. Statistically speaking, the majority of investors that trade penny stocks lose money. Unfortunately, most success stories come from social media, where profit claims are unaudited.

Penny stock scammers will advertise guaranteed or low-risk profits as a way to lure beginner traders into paying for expensive monthly subscriptions or lessons. Chat rooms, newsletters, and live streams are typical subscription offerings that beginners should review with great caution to avoid scams.

How do beginners buy penny stocks?

For beginners who want to buy penny stocks, the following checklist can help improve your experience buying and trading.

1. Account options: Choose a trustworthy firm to open an online brokerage account.

2. Analyze details: Research the penny stocks you are considering as much as possible, which is difficult given the lack of reporting required by OTC exchanges.

3. Stay safe: Avoid penny stocks that are susceptible to market manipulation such as those targeted by "pump and dump" schemes, or that you may have heard about on online forums and in chat groups.

4. Diversify properly: Make sure that you diversify your portfolio to avoid putting too much at risk in one or more penny stocks.

5. Have a strategy: Decide what price targets you have for the upside (profit) and downside (risk), where you would exit the trade, or on a time-horizon for which you are willing to hold the position, regardless of the price action.

6. Take long-term views: Choose quality companies that have long-term potential for growth, and be willing to endure long stretches of time where such results may be delayed, including in the reflected penny stock price.

TD Ameritrade penny stock trading order ticket

Where do you find penny stocks?

If you want to know where to buy penny stocks or just want to do some research, you can use an online stockbroker; most offer penny stock trading. The best brokers in our analysis include the following:

Fidelity - $0 per trade
TD Ameritrade - $6.95 per OTCBB trade
Charles Schwab - $6.95 per OTCBB trade
TradeStation - $0 per trade (up to 10,000 shares)
Interactive Brokers - $.0035 per share

For additional tools to find penny stocks to trade, you can start with a penny stock screener or market mover list. For example, Yahoo Finance's Trending Tickers and Small Cap With Momentum pages both list companies that have jumped in price for the day. Ideal for day trading, the best time to trade momentum stocks is after the market opens at 9:30 a.m. Eastern.

What app can I use to buy OTC stocks?

Here are the best mobile trading apps for buying OTC stocks:

Fidelity - $0 per trade
TD Ameritrade - $6.95 per OTCBB trade
Charles Schwab - $6.95 per OTCBB trade
TradeStation - $0 per trade (up to 10,000 shares)
Interactive Brokers - $.0035 per share

Once you find the stock symbol you want to trade and create an order, you may need to accept a risk disclaimer related to the increased risk that comes with trading stocks that are not listed on a primary venue, such as NYSE or NASDAQ.

Can penny stock prices be manipulated?

Since most penny stocks have a low number of shares traded each day (low liquidity), prices are easy to manipulate. This makes penny stocks prime candidates for pump and dump investment schemes.

What is a common penny stock myth?

When trading penny stocks, beginners often think they are getting "more for their money" because they can buy more shares in total. This is a myth. Stocks that trade for pennies are far more risky because they trade OTC and do not meet the strict financial requirements to be listed on a major stock exchange like the NASDAQ or NYSE.

Does Robinhood support OTC stocks?

Robinhood does not support trading OTC stocks. The only penny stocks supported by Robinhood are stocks that trade on either the NASDAQ or NYSE. If a company listed on the NASDAQ or NYSE trades below $1 for a certain period of time (or fails to meet other minimum financial metrics), it can be delisted and forced to trade OTC. As a result, OTC stocks are risky.

Summary

To recap, here are the best online brokers for trading penny stocks.

Best brokers for trading penny stocks 2021

Methodology

For the StockBrokers.com 11th annual best trading platforms review published in January 2021, a total of 2,816 data points were collected over three months and used to score brokers. This makes StockBrokers.com home to the largest independent database on the web covering the online broker industry.

Participation is required to be included. Each broker completed an in-depth data profile and offered executive time (live in person or over the web) for an annual update meeting. Our rigorous data validation process yields an error rate of less than .001% each year, providing site visitors quality data they can trust. Learn more about how we test.