How To Buy Penny Stocks: Step-by-Step Guide

DNY59 / Getty Images

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Penny stocks may seem like a bargain, but their low prices come with high risks. These inexpensive shares, typically from smaller companies, can offer big gains — or leave you with heavy losses.

If you’re wondering how to buy penny stocks the smart way, this guide will walk you through it.

What Are Penny Stocks?

Penny stocks are shares of small companies that typically trade for less than $5. These stocks can be highly volatile and are often traded on over-the-counter markets, though some are listed on major exchanges.

Buying them requires extra caution and research — but it can be done safely with the right strategy.

How To Buy Penny Stocks: Step-by-Step Guide

Buying penny stocks works much like purchasing any other stock, but with a few extra considerations, especially for those traded OTC.

Step 1: Open a Brokerage Account

Select a brokerage that supports penny-stock trading. Most $0 commission investment platforms, including Fidelity, Schwab, E*TRADE and Robinhood, all let you trade exchange-listed penny stocks.

OTC stocks are more difficult to trade. Robinhood doesn’t support them at all, and the other brokerages might have conditions on their sale. E*TRADE, for example, charges a $4.95 or $6.96 commission, depending on how many you trade.

Quick Tip

After you’ve opened your account, transfer funds into it to trade with. One way to do that is by linking a bank account.

Step 2: Research and Choose Stocks

If you’re new to trading, start by reviewing the educational resources on the brokerage website. These resources can provide general information about the risks of penny-stock trading, how to select stocks and how to trade them.

Once you’ve identified a stock you might want to invest in, read through the the information in its listing to get a sense of the company’s financial health.

Here are some things to look for:

• Market cap: What is the value of the company, measured by market cap?
• Financials: Is the company profitable or not? What are its earnings per share?
• News and press: Are there recent press releases or news articles about the company?
• Volume: How many shares are trading every day?

Good To Know

Remember that OTC stocks don’t necessarily have the same reporting requirements as exchange-traded stocks.

You might have to piece together information from the companies’ websites and from news reports.

Step 3: Place an Order

Before you invest, decide how many shares to purchase. Start small to begin with, and never invest more money than you’re prepared to lose.

Next, decide what kind of order to place. For example:

• Market order: Buy the stock immediately (or as soon as possible) at the best available price.
• Limit order: Buy the stock only if it’s available at or below the maximum price you set.
• Stop order: Buy the stock at the going price after it has traded at a specific price you set.

Step 4: Monitor Your Investments

Stock prices often fluctuate often, at least for shares investors are actively trading. With risky investments like penny stocks, it’s always better to quit while you’re ahead or get out before you’ve lost too much.

Smart Strategies for Penny Stock Investors

No matter how you trade, penny stocks are high-risk. But you can mitigate that risk with a few simple strategies.

The following are good practices for all stock trading, but they’re especially important when buying penny shares:

• Diversify your portfolio: Divide your investing dollars among several stocks in different sectors of the stock market.
• Use stop-loss orders: Whereas a stop order buys the stock once it reaches a certain price, a stop-loss order sells it when it reaches a price you set. This can limit your loss, but there’s no guarantee the price won’t have plummeted further by the time the stock sells. Also, it’s only available for exchange-traded shares.
• Only invest what you can afford to lose: Even the most experienced traders lose money at least some of the time. In the beginning, you’re likely to lose more than you gain.

Pro Tip

A good rule of thumb is to keep penny stocks to 10% or less of your total stock portfolio.

Safe Alternatives To Penny Stocks

Penny stocks aren’t the only way to invest with a small budget. Others provide the same benefit with less risk.

• Small cap stocks:
  • Penny stocks often have ultra-low capitalizations. Small cap stocks, on the other hand, are for companies with capitalizations of $250 million to $2 billion that might be more stable.
• Mutual funds and exchange-traded funds:
  • Rather than invest in individual stocks, you can invest in an ETF or mutual fund containing many different small-cap stocks. That diversification reduces risk, and you can buy in at a low cost.
  • In the case of a mutual fund, look for one with no minimum investment required.
• Fractional shares:
  • Many brokerages make individual stocks and ETFs available as fractional shares.
  • If, for example, you were to buy $5 worth of a stock trading for $100, you’d own 1/20 of a share. This is an inexpensive way to invest in higher-quality stocks.

Jared Nigro, Scott Jeffries and John Csiszar contributed to the reporting for this article.

Share This Article: