Best Penny Stock Brokers

You have many different trading platforms to choose from when it comes to trading penny stocks. So, my guide will tell you about some of the best penny stock brokers in the US, and what you need to know about investing in penny stocks before you start trading.

Also consider: Best Stocks and Shares to Buy Now

Top penny stock brokers for May 2023

Browse my list of the best penny stock platforms for US investors below

Best penny stock brokers at a glance

• Interactive Brokers
• eToro
• Firstrade
• Tradestation
• TD Ameritrade
• Charles Schwab
• Robinhood
• Fidelity
• E*Trade
• Webull Trading

What are penny stocks?

A penny stock is a company that trades for less than $5 a share, or a similar low unit price in foreign countries, such as the UK.

Just because these penny stock companies have low share prices, it doesn’t mean that all of them perform poorly – many drive the price down by issuing new shares as the price climbs.

Since shares represent control over a company, a business can prevent itself from being taken over by a majority shareholder by issuing new shares.

However, some penny stock companies can be smaller and less frequently traded, which can sometimes result in less liquidity. That means you could potentially have a harder time offloading shares when you come to sell them.

For these reasons, it’s important that you keep an eye on the liquidity of a penny stock company if you want to invest in it. Wider bid spreads—the value by which the asking price of shares exceeds the bidding price—are typically more common with penny stocks thanks to this liquidity.

In the US, some penny stocks trade on large exchanges such as the New York Stock Exchange (NYSE). The vast majority, however, trade via over-the-counter (OTC) transactions through the electronic OTC Bulletin Board (OTCBB) or through the privately-owned OTC Markets Group.

Some of the best penny stocks are household names, such as GameStop, while others you may not have heard of, such as Borr Drilling Ltd or ADMA Biologics Inc.

You can find out more about some of the best penny stocks you should keep an eye on later in my guide.

What risks are involved with penny stock trading?

Penny stock trades are usually considered high-risk investments compared to other, more traditional forms of investing.

Lower liquidity and higher volatility can cause investors to potentially lose their entire investment due to swings in stock prices.

This is why penny stock traders will often use stop-loss limits on their orders. Stop-loss orders allow you to input a particular value for how low you’re willing to let your investment fall in value. If your penny stock then reaches this value, it will automatically be sold to limit your losses.

You should also keep in mind that there’s typically less information available about penny stock companies. Unlike a well-established blue-chip company, it can be a lot harder to find reliable industry news or corporate performance information about the company.

Without adequate information about a company, you may find it difficult to gauge how its price could move on the stock market. This lack of insight over possible upcoming important milestones that could influence the stock price, like the release of a new product, make it harder to predict developments.

As mentioned, penny stocks tend to have lower liquidity, which can open them up to manipulation. For example, the “pump and dump” scheme involves tricking investors into buying large quantities of shares, which drives the price up on the stock market, attracting more investors. Once the stock price has been artificially increased, the scammer will then sell all their shares for a good price.

The different ways you can invest in penny stocks

When you first think of investing in penny stocks, chances are the first thing that comes to mind is the buying and selling of shares on the stock exchange.

Although, you may be surprised to hear that there are several different ways you can invest in both US and international stocks. So, continue reading my guide to find out the various ways you can invest, and which would best suit you.

Purchase shares individually

As the name suggests, purchasing shares individually involves buying particular penny stocks through your broker.

You can then sell these shares at a later date when the price has increased and, by doing so, leave with a nice little profit. Or, if the company offers dividends, you can hold onto your penny stocks and rely on dividend payments.

However, it’s worth noting that not all penny stock companies offer dividend payments. This is primarily due to their smaller size and lower revenues, or if it’s a larger company then they will most likely be undergoing restructuring or possible financial issues.

Gain exposure through a fund

You can also get exposure to a variety of different penny stocks through a fund.

A fund is a type of pooled investment in which money is accumulated from investors and subsequently reinvested in many different companies.

Funds are usually overseen by fund managers, who are typically experts in their field. Since fund managers will try to spread risk by diversifying funds, you are gaining instant diversification by investing in one.

The share value of the fund then depends on the performance of its constituent companies. If the value of its investments increases, so does the value of the fund.

Much like trading individual shares, you can either invest in a fund, wait until the price has increased, and then sell your units, or you can hold onto them and rely on dividend payments.

You typically have two options when you’re looking to invest in a penny stock fund: you can either find a fund that includes your desired company or one that specifically tracks penny stock companies.

Some examples of specific penny stock funds could be the iShares Micro-Cap ETF or the First Trust Dow Jones Select MicroCap Index Fund.

You should keep in mind that when you invest in a fund, you may face higher costs and charges. And, since penny stock funds are usually actively managed, you are compensating the work of the fund managers who are overseeing the fund.

What is the best way to invest in penny stocks?

The best way to day-trade penny stocks will depend on what your reasons for investing are, and also how experienced you are in trading in general.

For example, if you’re still new to penny stock trading, you may want to consider gaining exposure to them through a fund. Conversely, if you are comfortable with trading and have the time to devote to the rather fast-paced nature of penny stocks then you may prefer to invest directly in penny stock shares.

Similarly, if you are investing for an income rather than growth over a longer period of time, individual shares or funds may be the option for you.

How to start investing in penny stocks

So, now that you know exactly what penny stocks are, and some of the best trading platforms available, you may be wondering how you actually go about day-trading penny stocks.

The process is simple enough, so continue reading my guide to find out how to invest in penny stocks.

1. Decide which broker you want to use

First off, you need to decide which penny stock trading brokers you want to open a trading account with.

Using the information above in my guide, you ideally want to compare the different penny stock trading platforms and figure out which best suits your needs.

For example, when beginners buy penny stocks, they may want to consider trading platforms that offer in-depth research, analysis, and trading tools.

Or, if you were planning on trading large volumes of shares, you may want to think about opening an account with the cheapest penny stock broker with lower trading fees.

2. Set up an account with your broker

Now that you’ve decided which penny stock broker you want to use, the next step is opening an account with that broker.

This process is simple enough—usually you will be required to input your information, and potentially upload any relevant financial documents the penny stock broker needs to confirm your identity.

3. Make a deposit to your brokerage account

Now you’re ready to make a deposit to your penny stock broker account.

Again, this is a simple enough process. All you need to do is input the value of the money you wish to deposit and make sure it enters your account, typically using a credit or debit card.

Be mindful of inflation

One thing you should be wary of is how much money you deposit into your broker account.

You ideally only want to deposit the amount of money you are planning on investing in penny stocks.

When you deposit money into an investment account, it’s unlikely that you will earn interest on any uninvested money. And, with inflation currently so high, there’s a chance your savings’ purchasing power will be eroded in real terms.

You should also only deposit and invest what you can afford. If you end up losing money, you may end up unable to pay your bills or afford your current lifestyle.

4. Decide how you want to invest in penny stocks

Next, you’ll need to figure out how you want to invest in penny stocks in the first place.

If you’re still a beginner to penny stock trading, you may want to consider either trading shares traditionally, or gaining exposure to them through a fund.

5. Make the investment

When all of the above steps have been followed, you’re finally ready to start trading on penny stock markets.

Simply search for the company or fund you wish to invest in, decide how many shares you’re going to buy, and then make the purchase.

The work doesn’t stop when you buy penny stocks though – you need to ensure you keep an eye on any price fluctuations with your penny stocks.

You may want to set up a stop-loss limit on your position to ensure that, if prices drop too much while you aren’t monitoring your order, you won’t lose too much money.

Penny stocks vs regular shares: which are better?

Now that you know what penny stocks are and how to invest in them, you may be asking yourself: what are the benefits of trading penny stocks over regular shares?

Well, like most things, penny stocks come with benefits and disadvantages. Continue reading to discover what these are, and the big differences between penny stocks and traditional shares.

Pros of penny stocks

Typically low cost

As the name suggests, penny stocks typically trade for lower prices than other investments.

This means that you don’t have to put forward as much initial capital to get on board and buy penny stocks as you would with a traditional blue-chip company.

This can be great for beginner investors—large companies with high share prices can often seem daunting for newcomers.

Chance of higher returns

Penny stock companies can be smaller and less established than their traditional counterparts.

This attracts investors, as it brings the opportunity for higher returns if the company does indeed become larger.

If the company you invest in ends up becoming a higher-valued business, you could turn a profit on your initial investment if share values increase by a decent amount.

Cons of penny stocks

There is sometimes less information available

Some of the penny stock companies you may be considering investing in could have less information available to investors.

This is because many of these penny stock companies are lesser-known compared to blue-chip companies.

You may find it tricky to find historic information or corporate earnings figures surrounding a penny stock company, which could make it difficult to properly predict penny stock prices.

Less liquidity

Many penny stock companies are less established or known to personal investors. This can often result in lower liquidity for investors since there are fewer people to trade stocks.

Investors may find themselves “locked in” to a particular penny stock if they can’t sell them due to low liquidity, and you could end up losing money rapidly.

Can be unpredictable

Since there is typically more volatility and less liquidity involved with penny stock companies and the stock exchanges they’re listed on, you may find it difficult to predict the prices of these companies.

There may be more fraudulent activity involved with penny stocks too, such as pump and dump schemes, which can also influence share prices.

While retail investors could make profits by trading stocks, there’s also a chance that they could lose large sums of money just as quickly.