The Best Online Brokers for Penny Stock Trading

What Are Penny Stocks?

penny stock is defined by the SEC as a low priced common stock: a stock trading below $5 a share. Penny stocks are generally traded outside the major stock exchanges (such as the Nasdaq or the NYSE) and are traded on what is called the over-the-counter-bulletin board (OTCBB) or through pink sheets. Both the OTCBB and pink sheets provide ways to trade stocks that do not meet the stringent listing requirements of the major exchanges. Of course, this also means that penny stocks are often far more volatile than your typical stock listed on the NYSE. Overall, because of the high risk associated with penny stocks, we do not recommend trading them unless you are a very sophisticated investor and have a clear strategy.

What to Watch Out For When Picking a Broker

1) Trade commissions and Fees – Because many penny stock trades involve a large number of shares, look for a broker that charges a flat commission. This will almost always save you money over the per-share surcharge levied by many brokers. TradeKing, for instance, tacks on an extra $.01 per share for stocks valued under $2, in addition to their standard $4.95 commission. If you trade 500 shares of a stock, this will add $5.00 to your trade.  Be sure to ask about any additional fees before making a decision, and keep in mind that different brokers have different definitions of penny stock. Some consider anything under $5 a penny stock, while others make the cut-off at $3 or $1, and some have other definitions.

2) Volume Restrictions – A good penny stock broker will allow you to trade unlimited shares without additional fees, but a few charge more for large orders. Some brokers also limit the number of penny stock shares you can trade in one order or in one day, forcing customers to pay another commission fee and slow down their trading strategy.

3) Trading Restrictions – Ideally, your penny stock broker will allow you to trade penny stocks with their online platform, just as you would a standard stock. Keep an eye out for firms who require you to trade penny stocks through a broker, or impose limits on the types of trades you can execute with them. For example, many brokerages don’t allow customers to short penny stocks. And some don’t trade stocks valued under a certain amount, like $0.05 or $0.01.

Best Overall Value

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  • Commission per trade: $8.95 (or value of trade, if less)
  • Promotion: Fund a new account with at least $50k and get 300 free trades
  • $1,000 account minimum
  • Learn more about Charles Schwab
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OptionsXpress

OptionsXpress shares many penny stock policies with its parent company, Charles Schwab. Like Schwab customers, optionsXpress customers have access to a great selection of penny stocks at a flat rate, with no additional fees. However, the brokerage doesn’t allow customers to short stock, something for active traders to keep in mind.

Active traders may be impressed, though, with optionsXpress’ trading tools. The brokerage has generated some excitement recently with its Idea Hub, which combines the functionality of several different site tools, allowing users to search for trade ideas by category – including earning and volatility – and market sentiment. Many also rate its all-in-one trade ticket as one of the best among online brokerages. Tools are available on both optionsXpress’ website and its Xtend desktop platform, but users often prefer the user-friendly website over the sometimes-slow Xtend.

The brokerage’s phone and live chat support is available for most traders during limited hours, Monday through Saturday and futures traders can receive 24-hour live support Sundays through Fridays. All of the firm’s customer service options, including email, receive generally good reviews, although some note that email response times can be slow.

Charles Schwab

Although Schwab has a fairly broad definition of penny stocks – anything under $5 qualifies – the brokerage has a flexible, economical commission structure and doesn’t charge any hidden fees for trading. They also have a wide selection and let customers with margin accounts short the securities, a must for many penny stock strategies.

Schwab is a great value brokerage, aside from their penny stock policies. Customers have access to the variety of investment products they should expect from a big-name firm, including over a hundred commission-free ETFs and standard banking services. There are no surcharges for after-hours trades. Customers can call 24/7 customer service with questions, and often report that reps are informed and thorough.

Clients making three or more trades per month gain access to StreetSmart Edge, Schwab’s advanced, completely customizable desktop platform with streaming quotes. Edge is very popular with investors, though not as good, most agree, as TD Ameritrade’s thinkorswim. As for research, Schwab is hard to beat, with a wide selection of third-party reports and in-house experts.

Best Brokers for Beginners

If you are just getting started trading penny stocks

  • Commission per trade: $9.99
  • Promotion: Fund a new TD Ameritrade account with at least $2,000 and get 60 days of free trades
  • $500 account minimum
  • Learn more about TD Ameritrade
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  • Commission per trade: $8.95
  • Promotion: Open a USAA brokerage account and get 50 free trades
  • No account minimum
  • Learn more about USAA
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TD Ameritrade

TD Ameritrade offers a flat commission structure and access to almost any penny stock on the market, with no hidden fees. The only problem? TD Ameritrade won’t let customers short penny stocks. Because of this, and because of their great educational resources and broker access, the firm might be a better choice for investors who are looking to trade penny stocks for the first time.

USAA

USAA isn’t known for catering to active traders, but unlike many brokerages, it does allow customers to short penny stocks, as well as place both market and limit orders. They also have a good selection and no hidden fees. That said, the company does charge a penny-per-share surcharge on any shares over 1,000, making USAA a bad place for the kind of large orders that experienced, active traders often place.

 

Cheapest Trades

If you are looking for the lowest possible commissions

  • Commission per trade: $6.95
  • Promotion: Receive up to $600 when you open your account
  • $2,000 account minimum ($25,000 to trade penny stocks)
  • Learn more about Merrill Edge
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Merrill Edge

Merrill Edge doesn’t have a surcharge for penny stocks, and doesn’t charge extra for high-volume orders, making it one of the cheapest brokers for penny stock trading. However, reps also say that the brokerage has a limited selection of penny stocks, and customers aren’t allowed to short them. In addition, they may not have an account composed entirely of penny stocks.

ChoiceTrade

ChoiceTrade’s penny stock commission is very reasonable, but the company does have a number of limitations. There’s a volume surcharge (1% of the trade value in trades of over 500,000 shares), and customers aren’t allowed to short. In addition, they won’t trade any stocks valued at under 5 cents.

 

Best Trading Platforms

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Interactive Brokers

Interactive Brokers is a favorite among very active traders. Their Trader Workstation platform is considered one of the best on the market, and the company places no limits on penny stock functionality. Customers can short the securities and place market or limit orders. There are a few catches, though. The firm passes on all exchange fees, so trading can get pricey, and clients can’t trade securities that aren’t DTC eligible.

Cobra Trading

Another great fit for professional and very active traders, Cobra clients have access to four different platforms and direct-access trading, among other premium features and a large selection of penny stocks. Like Interactive Brokers, the brokerage also allows traders to short penny stocks, and place both market and limit orders. And unlike many competitors, they even give a discount – 20% off – for orders over 250,000 shares. On the other hand, customers will pay for the functionality. The firm passes on exchange fees to penny stock customers, on top of their already-hefty platform fees.

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