How to Invest in Penny Stocks

Brokers, Investing

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A little trepidation about investing in stocks never hurts. After all, you’re putting your money on the line. That healthy fear is particularly appropriate for penny stock investing.

Read on to learn NerdWallet’s tips for trading penny stocks and choosing the right broker for this endeavor, or simply choose one of the options on the left to skip to a specific section.

What is penny stock trading?

Penny stocks — often called OTC or over-the-counter stocks — are a lot like they sound, though they don’t actually cost a penny. Generally defined as stocks that trade for less than $5 per share, penny stocks 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.

Five dollars a share seems like a steal when stacked against companies that trade for $500 or more. This is where the backstory is important: These stocks are cheap for a reason. Because they are issued by small, yet-to-be-established companies, penny stocks can be volatile. They are often hard to research and accurately value, and they trade infrequently, which means they can be tough to sell.

For more context on trading penny stocks, see our article on what a penny stock is.

How to invest in penny stocks

Investing in a penny stock is essentially betting on a long shot. Penny stock investors dream that some company they pick will rise meteorically, and their inexpensive investment will pay off in an exponential return. The internet is full of “success stories” that fuel these hopes.

Trouble is, true success stories are exceedingly rare for penny stock traders. Most of the companies in the pink sheets will disappear over time and take their investors’ dollars with them. Here are a few tips for maximizing your chances of finding those rare winners:

  • Recognize you’re betting on a long shot and invest with care.
  • Avoid companies with low trading volume to increase your chances of being able to sell later.
  • Ignore the hypesters as they scarcely ever have your best interests at heart.
  • Look for quality companies by examining underlying fundamentals.
  • Stay diversified and never overweight yourself in any single company.
  • Dabble in this realm rather than diving in deep with a significant investment.

Using these tips won’t guarantee success. But they can help you sidestep some of the more egregious mistakes in this realm.

» Not sure about penny stocks? See our overall rankings for the best online brokers for stock trading

Choosing a penny stock broker

In case the above didn’t make this clear: NerdWallet does not recommend taking on the risks that come with trading penny stocks unless you are a sophisticated investor and you understand this market. But if you’re set on this strategy, you can at least go in with your eyes open. When selecting an online broker to trade penny stocks, you want to be aware of the following:

Trade surcharges: Brokers often add a surcharge to stocks that are valued at less than a certain dollar amount, though that threshold will vary by broker. Some consider anything trading under $5 to be a penny stock, while others put the cutoff at $3 or $1. Because penny stock trades typically involve a large number of shares, it’s usually best to skip brokers with a surcharge and look instead for a broker that charges a flat commission.

Volume restrictions: The best penny stock brokers allow trades of 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, slowing your ability to trade and forcing you to pay another commission for a second order.

Trading restrictions: Watch out for firms that require you to trade penny stocks by placing a phone order or that impose limits on the types of trades you can execute. Ideally, your penny stock broker will allow you to trade penny stocks with the same online platform used for other stock trades.

Below are NerdWallet’s top brokerages for penny stock traders. Each of the category winners below offers a uniquely strong suite of features for penny stock trading. Read on to see which suits your trading preferences best.

Summary: Best Brokers for Penny Stock Trading




Best overall value in trading penny stocks

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

Charles Schwab and E-Trade both offer a large penny stock selection, no penny stock surcharge and the ability to trade these stocks online. Schwab could easily win every category here. The company has high-quality trading platforms and charges a reasonable and flat $4.95 trade commission. E-Trade’s pricing is tiered to benefit frequent traders. The standard commission is $6.95, but that drops to $4.95 per trade for investors who place 30 or more trades per quarter. Both companies have helpful customer service and a breadth of educational offerings.


The lowest-cost penny stock brokers

These brokers will appeal to investors who prioritize low commissions.

If commissions are your main concern, Merrill Edge and Interactive Brokers are good options — as is Charles Schwab, already mentioned above. Interactive Brokers caters to active traders, with a 0.5 cent per share commission, a $1 minimum per order and no additional charge for penny stocks. In addition to that, the broker caps commissions at 0.5% of trade value. Interactive Brokers does, however, have a $10,000 account minimum, monthly commission minimums of $10 and net worth and income minimum requirements by age.

Merrill Edge has a $6.95 flat commission with no OTC surcharge. Clients may trade penny stocks only if they have an account value of at least $25,000, and the company says penny stock positions shouldn’t exceed 20% of that value.


The best trading platforms for penny stocks

These online brokers offer impressive trading platforms alongside flat commissions.

Both of our top picks offer the tools and trading platforms you need to trade penny stocks, but if you’re searching for additional options, TD Ameritrade and TradeStation are both worth a look. TD Ameritrade’s $6.95 trade commission is higher than some brokers, but its thinkorswim platform is one of the best available, and its web-based platform Trade Architect is a streamlined option more suitable to beginner traders. TradeStation charges $4.99 to $8.99 per trade based on volume. The company earns just three stars in our overall review, mostly due a $99.95 per month inactivity fee, but trading 5,000 shares per month — an easy bar for penny stock traders — waives that charge. The broker’s desktop platform is complex but extensive, with automatic execution and advanced strategy tools. OTC data is $5 a month. 

Summary: Best brokers for penny stock trading

Account minimum
Start investing


Large selection; discounts for frequent traders
$6.95 - $4.95, based on volume
60 days of commission-free trades ($10,000+ deposit)

Charles Schwab

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

Merrill Edge

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

Interactive Brokers

Interactive Brokers
Low costs
Per-share commission
$0.005 per share
Special terms for younger traders

TD Ameritrade

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


Trading platform
Extensive trading platform
$4.99 - $9.99, based on volume
20% off commissions

If you’re still on the fence about penny stocks, learn more about some of your other investment options:

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

Updated March 3, 2017.