What Are Penny Stocks?

A 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

Combines low pricing with quality execution and research and data tools