Best Brokers for Penny Stock Trading: 2016 Top Picks

Brokers, Investing
The Best Online Brokers for Penny Stock Trading

It’s always wise to know what you’re getting into before you start trading online — after all, your money is at stake. But that warning is particularly true for penny stocks.

What are penny stocks?

Often called OTC or over-the-counter stocks, these are low-priced stocks that are traded outside the major stock exchanges. Instead, they’re quoted on the OTC Bulletin Board or through the OTC Markets Group (formerly known as Pink Sheets), a financial marketplace that lists 10,000 securities and allows investors to trade via online brokers. Despite their name, penny stocks don’t cost just a penny; they’re generally defined as stocks that trade for less than $5 per share.

Still, $5 a share is inexpensive when compared to companies that trade for $500 or more, and getting into the market for a few bills seems like a good deal. This is where the backstory is important: Because they are issued by very small, yet-to-be-established companies, penny stocks tend to be very volatile. They can be difficult to research and accurately value, and they trade infrequently, which means they can be hard to sell.

Things to watch for when selecting a broker

Because of the high risk associated with penny stocks, NerdWallet does not recommend trading them unless you are a very sophisticated investor. But if you’re set on this strategy, here’s what you need to watch out for when selecting an online broker:

Trade surcharges: Many brokers add a surcharge to stocks that are valued under a certain dollar amount. Because many penny stock trades involve a large number of shares, look instead for a broker that charges a flat commission. This will almost always save you money: For example, TradeKing tacks on an extra 1 cent per share for stocks valued under $2, in addition to the company’s standard $4.95 commission. If you trade 500 shares of a stock, this will add $5 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 trading under $5 to be a penny stock, while others put the cutoff at $3 or $1.

Volume restrictions: The best penny stock brokers 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 you to pay another commission fee and slowing down your trading strategy.

Trading restrictions: Ideally, your penny stock broker will allow you to trade penny stocks with its online platform, just as you would a standard stock. Watch out for firms that require you to trade penny stocks by placing a phone order, or impose limits on the types of trades you can execute. For example, many brokerages don’t allow customers to short penny stocks, and some don’t trade stocks valued under a certain amount.

Best overall value in trading penny stocks

These brokers combine flat trade prices with quality execution, research and data tools.

Etrade 4.5-stars
  • Offers a large investment selection with discounts for frequent traders. See our E-Trade review.
  • Commission: $9.99 per trade; volume discounts available
  • Account minimum: $500 (no minimum for IRAs)
  • Promotion: 60 days of commission-free trades with deposit of $10,000 or more
OptionsXpress-Logo 4.5-stars
  • Offers a large investment selection with flat commissions on OTC stocks. See our optionsXpress review.
  • Commission: $8.95 per trade
  • Account minimum: $0
  • Promotion: 50 commission-free trades with deposit of $5,000 or more

OptionsXpress and E-Trade have similar features, including a large penny stock selection, strong — but not exceptional — trading tools, and flat commissions on penny stocks with no surcharges to drive up the price. Key difference: OptionsXpress charges a flat $8.95 commission for stock trades. E-Trade has a tiered pricing structure that benefits frequent traders; those who place 150 or more trades per quarter pay just $7.99 per trade, and placing 1,500 or more trades per quarter drops the price even further, to $6.99. Both companies have helpful customer service and a breadth of educational offerings.

The best trading platforms for penny stocks

These online brokers offer top-notch trading platforms and flat commissions.

td-ameritrade 5.0-stars
  • Two powerful trading platforms available to all customers. See our TD Ameritrade review.
  • Commission: $9.99 per trade
  • Account minimum: $0
  • Promotion: Cash bonuses ranging from $100 for deposits of $25,000 to $99,999, to $600 for deposits of $250,000 or more
Chales Schwab 5.0-stars
  • Reasonable commission and two trading platforms available to all customers. See our Charles Schwab review.
  • Commission: $8.95 per trade
  • Account minimum: $1,000
  • Promotion: $100 to $500 cash bonus for deposits of $10,000 or more

TD Ameritrade and Charles Schwab (the parent company of our top pick optionsXpress) both offer flat commission structures with no hidden fees. They also have very strong trading platforms. TD Ameritrade’s thinkorswim is one of the best platforms available, and its web-based platform Trade Architect is a streamlined but still robust option more suitable to beginner traders. Schwab offers two choices as well: Streetsmart.com, a web platform, and StreetSmart Edge, a more advanced option. At both brokers, all tools and platforms are available free of charge, without trade minimums or balance requirements.

The lowest-cost penny stock brokers

For investors who prioritize low commissions.

merrill edge logo 4.5-stars
  • Low, flat commission for penny stock trades. See our Merrill Edge review.
  • Commission: $6.95 per trade
  • Account minimum: $25,000 for penny stock trading
  • Promotion: Cash bonuses ranging from $100 for deposits of $20,000 to $49,999, to $600 for deposits of $200,000 or more
ChoiceTradelogo 2.5-stars
  • Low, flat commission for penny stock trades.
  • Commission: $7 for OTC trades
  • Account minimum: $0

If commissions are your main concern, Merrill Edge and ChoiceTrade are good options. Merrill Edge has a $6.95 flat commission with no OTC surcharge, and the company defines over-the-counter penny stocks as those that trade for less than $1 a share. Clients may only trade in these securities with an account value of at least $25,000. Penny stock positions cannot exceed 75% of that account value.

ChoiceTrade shows up here because although the company adds a $2 penny stock surcharge to its standard $5 stock trade commission, a flat $7 OTC trading commission is very competitive. But the broker rates only two and a half stars for a reason: ChoiceTrade imposes a volume surcharge of 1% of the trade value for trades over 500,000 shares and charges a $30 inactivity fee per quarter on accounts that don’t trade at least five times or maintain account equity greater than $50,000. The company also tacks on an additional $14.95 monthly fee for its Quotestream trading platform, and research and data frequently have an additional charge.


Summary: Best brokers for penny stock trading

Broker
Best
for
Highlights
Commiss-
ions
Promotion
Account minimum
Start investing

E*Trade

E*Trade
Overall
Large selection; discounts for frequent traders
$9.99
per trade; volume discounts
60 days of commission-free trades ($10,000+ deposit)
$500

OptionsXpress

OptionsXpress
Overall
Large selection; flat OTC commissions
$8.95
per trade
50 commission-free trades ($5,000+ deposit )
$0

TD Ameritrade

Trading platform
Two powerful trade platforms
$9.99
per trade
$100-600 cash bonus (based on account size)
$0

Charles Schwab

Charles Schwab
Trading platform
Reasonable commission; two trading platforms
$8.95
per trade
$100 to $500 cash bonus for deposits of $10,000 or more
$1,000

Merrill Edge

Merrill Edge
Low cost
Low, flat commission
$6.95
per trade
$100-600 cash bonus (based on account size)
$25,000 (OTC trading)

ChoiceTrade

ChoiceTrade
2.5 stars
Low cost
Low, flat commission
$7.00
per OTC trade
None
$0
Broker
Best
for
Highlights
Commiss-
ions
Promotion
Account minimum
Start investing

E*Trade

E*Trade
Overall
Large selection; discounts for frequent traders
$9.99
per trade; volume discounts
60 days of commission-free trades ($10,000+ deposit)
$500

OptionsXpress

OptionsXpress
Overall
Large selection; flat OTC commissions
$8.95
per trade
50 commission-free trades ($5,000+ deposit )
$0

TD Ameritrade

Trading platform
Two powerful trade platforms
$9.99
per trade
$100-600 cash bonus (based on account size)
$0

Charles Schwab

Charles Schwab
Trading platform
Reasonable commission; two trading platforms
$8.95
per trade
$100 to $500 cash bonus for deposits of $10,000 or more
$1,000

Merrill Edge

Merrill Edge
Low cost
Low, flat commission
$6.95
per trade
$100-600 cash bonus (based on account size)
$25,000 (OTC trading)

ChoiceTrade

ChoiceTrade
2.5 stars
Low cost
Low, flat commission
$7.00
per OTC trade
None
$0

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.

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