generic The Best Penny Stock Brokers
The so-called “penny stock” industry has long had a bad reputation as the realm of stock promoters and other hucksters looking to take money from investors. And while that industry for low-cost stocks still exists, there is a newer definition of “penny stocks” that applies to a much broader universe of companies. Still, there are enormous risks with buying penny stocks, even in the midst of potential rewards, and you can very well end up losing some or all of your investment.
Even with all the risks, many investors are still tempted by penny stocks. After all, it’s quite common to hear from a friend about how they made a killing in penny stocks, or from a stock commentator offering the hot pick du jour. If you understand the risks involved in buying penny stocks and are still looking to invest, it’s best to at least work with a reliable, low-cost broker. With these highly volatile, lesser-known stocks, a robust research platform and lower trading costs can be especially important.
Here are the top penny stock brokers:
Charles Schwab
TradeStation
TD Ameritrade
Fidelity
Interactive Brokers
Merrill Edge
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What Is a Penny Stock?
The Securities and Exchange Commission defines a penny stock as one issued by a very small company with a price below $5 a share. Most — if not all — penny stocks qualify as what’s known as “micro-cap” stocks, referring to the small size of their market cap.
The term penny stock refers to the fact that the SEC formerly defined these securities as any micro- or small-cap stock trading at a share price under $1.
What to Consider in a Penny Stock Broker
A good penny stock broker is going to have many similar traits to a good broker of other stock types, like low trading costs and access to quality tools and research. Given the low per-share price, however, the need for lower trading costs can become even more pronounced.
Importantly, even the best research tools can still be limited to stocks registered with the SEC and traded on major exchanges. While many stocks in the $5 range do trade on the major exchanges and are registered with the SEC, this doesn’t apply to many true “penny stocks” that trade for a handful of cents per share. You might have to do extra legwork on your own to find out legitimate information about these types of companies, even with the best penny stock brokers.
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Here’s a closer look at the top six penny stock brokers:
Charles Schwab
Commission: $0 per trade
Account Minimum: $0
Charles Schwab is a well-established brokerage with a long history, and the cost per trade puts it among the most competitively priced as well. The $0 account minimum also makes it a great choice for investors just looking to dabble in penny stocks.
TradeStation
Commission: $0 per trade
Account Minimum: $0* ($2,000 minimum to use desktop platform, $0 for web and mobile)
TradeStation has dropped its commissions down to zero to better compete in the online brokerage space, which is good news for penny stock investors. However, if you want to use the firm’s desktop trading platform, you’ll need to cough up $2,000 to open an account. Note that TradeStation does charge a $50 inactivity fee if you don’t keep $2,000 in the account or make at least five trades per year.
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TD Ameritrade
Commission: $0 per trade
Account Minimum: $0
The $0 per-trade fee at TD Ameritrade used to be groundbreaking but now is a basic requirement to compete as one of the best penny stock brokers, or even online brokers in general. This is especially true if you are planning on trading smaller quantities of many different stocks. With no account minimum, TD Ameritrade could be a strong choice for novices looking to start with a minimal investment.
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Fidelity
Commission: $0 per trade
Account Minimum: $0
Fidelity’s trading costs are right in line with the most competitive in the industry, and there are no annual fees. This mutual fund powerhouse is now also competitive as a stock-trading firm, with no account minimums or fees. This makes the venerable firm a good choice for penny stock investors.
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Interactive Brokers
Commission: $0 per share
Account Minimum: $0
Interactive Brokers has a variety of fee schedules, but U.S. residents have the option of using a no-minimum, no-commission platform to trade U.S.-listed equities and ETFs. The brokerage won the Barron’s 2021 award for #1 best online broker, and it’s definitely a solid choice for penny stock traders.
Merrill Edge
Commission: $0 per trade
Account Minimum: $0
Merrill Edge was one of the first expansions of a traditional, full-service brokerage into the low-cost, online brokerage space. With a $0 account minimum and a $0 per-trade commission schedule, Merrill Edge competes with the best of the online brokers. Merrill Edge has the additional benefit of being backed by the research capabilities of a well-known, global full-service firm.
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Investing in Penny Stocks
Several risks associated with penny stock investing require you to be cautious. You should seriously evaluate your investing options and financial situation before you consider buying shares through any broker. Penny stocks have some key characteristics that can easily burn someone who isn’t familiar with the specific issues presented by looking at the smallest companies out there.
True “penny stocks,” or those trading for cents-per-share, don’t always have to register with the SEC, which means that they aren’t required to produce regular, professionally audited reports on their finances and don’t have minimum requirements for shareholders. Investing without access to quarterly reports, income statements or balance sheets is always inadvisable and even riskier when involving companies that aren’t regularly in the public eye.
Although the SEC’s definition of penny stocks includes stocks up to $5 per share that may be registered and trading on an exchange, this doesn’t necessarily make them any safer. Usually, these companies are “fallen angels” that may have once been successful but now have fallen on hard times and are in danger of failing. In other words, just because a stock has traded down in value from, say, $100 per share to $3 doesn’t necessarily mean it’s a “value.” Oftentimes, companies with these types of precipitous falls are on their way to going bankrupt.
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Another danger with trading penny stocks is that you might not always be able to find a buyer if you want to sell. This is known as “liquidity risk,” and it’s a common problem with penny stocks. It’s easy to forget that you can’t sell a stock without a buyer when you only deal with highly liquid blue-chip stocks where there’s always millions of shares trading hands each day, but if your penny stock starts to plummet and you can’t find someone to unload it onto, you might just have to ride it all the way down to zero.
And finally, the combination of low liquidity and lack of reporting make the potential for fraud much higher for penny stocks. Old-school investing schemes like the “pump and dump” are much more feasible with penny stocks because it’s easier to manipulate share prices through the market.
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John Csiszar contributed to the reporting for this article.
GOBankingRates bases its assessment of “best” and “top” products on various factors such as commission and account minimum to create a baseline for comparison. This assessment is an approximation of “best” and “top” designed to help consumers find products that might be appropriate for them. There could be other options available as well. Consumers should consider various options appropriate for their personal circumstances.
Last updated: May 19, 2021
This article originally appeared on GOBankingRates.com: The Best Penny Stock Brokers
