Many investors have been tempted by penny stocks. You might have a friend insisting he knows the best penny stocks to buy right now or a relative who is sure she knows the hot penny stocks on the verge of blowing up — and it can be easy to let the lure of fast riches get to you. Although it is true that investing in penny stocks comes with the potential for some of the largest returns out there, penny stock investing also comes with enormous risks and the distinct potential that you’ll lose most or all of your investment.
If you are interested in accepting the huge risks associated with penny stocks to chase that small chance of huge returns, one of the most important decisions you’ll make is selecting the right 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
- TD Ameritrade
- Interactive Brokers
- Merrill Edge
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.
Similarly, even the best research tools can still be limited to stocks registered with the SEC and traded on major exchanges. If you’re going to trade penny stocks, you should look for a broker that has research tools that include a look at over-the-counter markets where many penny stocks trade.
Here’s a closer look at the top six penny stock brokers:
- Commission: $4.95 per trade
- Account Minimum: $1,000
Charles Schwab is a well-established brokerage with a long history, and the cost per trade under $5 puts it among the most competitively priced as well. The $1,000 account minimum could put it out of reach for someone looking to start small, though.
- Commission: $5 per trade
- Account Minimum: $500
TradeStation also has the $5 per-trade fee that many discount brokerages charge, but it also includes a clearing fee of $0.0002 a share that is going represent a larger percentage of your total costs given the low per-share prices for penny stocks. There’s also a $50 annual fee applied to accounts that fail to maintain an average balance of $2,000 or more.
- Commission: $0 per trade
- Account Minimum: $0
The $0 per trade fee is one of the lowest of the six brokers on this list, which could be good for penny stock investing — especially if you were 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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- Commission: $4.95 per trade
- Account Minimum: $2,500 for certain accounts
Fidelity’s trading costs are right in line with some of the most competitive in the industry, and there are no annual fees. The $2,500 minimum deposit for opening an account is the second-highest of these six brokers, however.
- Commission: $0.005 per share
- Account Minimum: $10,000
Interactive Brokers presents a markedly different pricing structure than most other brokers, charging a half-cent per share on each trade. Although that could be beneficial if you intend to trade in small batches, it will end up eating up a larger percentage of each trade based on the low per-share price. And, if you hope to avoid commissions with smaller traders, the $10,000 account minimum — the highest on this list — means you need to make a substantial financial commitment just to get started.
- Commission: $2.95 per trade
- Account Minimum: $0
The two brokers that will allow you open an account without a minimum balance appear to make up for that by charging higher commissions as Merrill Edge also charges close to $7 a trade. With no annual fees and no minimums to get started, however, you might find the additional cost per trade pays off in more flexibility, depending on your needs.
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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.
Penny stocks 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.
Penny stocks also have a “liquidity risk,” meaning that you might find yourself wanting — or needing — to sell your shares and not able to. 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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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.