Penny stocks are the source of some of the biggest FOMO (fear of missing out) regrets. Who would not have wanted to have invested $100 in Netflix when it was trading for $1 in 2003? Today, after several stock splits, those 100 shares would be worth over $30,000.
The opportunity to support an early-stage media or biotech company is one of the many reasons investors are excited about penny stocks. Because for the many penny stocks trade for a few dollars, and many for less than a dollar, the upside potential is huge.
However, if you’ve never bought penny stocks before it can be difficult to identify a penny stock with the most growth potential.
In this step-by-step guide, we will explain how to buy penny stocks for beginners. We will also define a penny stock, tell you when to buy penny stocks, where to buy them, and how to get the most out of your penny stock trading experience.
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What are penny stocks?
Penny stocks are stocks with a market capitalization of less than $300 million. These small caps typically trade for less than $5 a share. They are categorized as:
Microcap stocks – Stocks that have market caps of $50 – $300 million
Nanocap stocks – Stocks with market caps of less than $50 million
Most of these are traded over-the-counter (OTC) but they may also trade on an exchange. You may also see penny stocks defined as:
- Small-cap companies
- Stocks with a maximum price under $5 (Schwab), under $3 (Fidelity) or under $1 (Robinhood)
Note: An OTC stock is not listed on a major exchange. Instead, they trade on an electronic bulletin board (known as the over-the-counter exchange) that directly connects buyers and sellers. Individual investors still need to go through a broker to access the major OTC platforms.
Why invest in penny stocks?
The main reason people invest in penny stocks is that penny stocks are cheap to buy, hence they provide a low risk-high reward investment opportunity.
How to buy penny stocks: Step-by-step guide
Are you wondering how to buy stocks? Unsure where to start and what sites to buy penny stocks from?
Then read on because the section below will explain step by step how to get started with investing in penny stocks in just a few steps.
Charles schwab - Best U.S. Penny Stock Broker for 2021
Fees: $4.95 per share
Min Deposit: $1,000
Charles Schwab is a discount broker. Investors choose Charles Schwab for its reputation and fully automated-to-human advisory brokerage service options. The Schwab One® brokerage low flat fee includes professional research from Morningstar and Credit Suisse and advanced charting.
Schwab lists more than 6,000 OTC stocks. The user-friendly broker has smoothly integrated OTC stock research and buying into its main dashboard. Or you may choose to buy one of Schwab’s small-cap ETF of index funds. Charles Schwab is also considered a valid platform for forex trading.
Moreover, the broker offers access to a large universe of exchange-listed small-to-large cap stocks, as well as access to the major OTC markets.
How to buy Penny stocks on Charles Schwab
Step 1: Open your Charles Schwab account and fill in your personal information and fund your account.
Step 2: Start your research of penny stocks using the Charles Schwab Market Screen This broker provides profiles of penny stocks, but as always with penny stocks, you may have to undertake some of your own research and due diligence. If the stock is covered, you will benefit from the extensive analysis from Morningstar. The market screener allows you to quickly locate small-cap stocks. Choose from Micro Cap or Small Cap and select your price criteria.
Step 3: Invest in penny stocks by clicking on trade Click on the stock you want to trade. From the stock profile page, click Trade. Place your order.
- Flat trading fees
- Over 6,000 OTC stocks to trade
- Well-integrated OTC trading
- A not-so-straightforward navigation process
Interactive Broker - Best U.K. Penny Stock Broker for 2021
Fees: $1 per share
Min Deposit: $10,000
Interactive Brokers is a full-service online broker with discounted fees. The trading fee is low, starting at $1 per share, which is important if you are buying penny stocks in small volumes.
Choose between a tiered or fixed-rate plan. The fixed-rate trading fee is 0.005 per share with a minimum of $1. IB SmartRouting ensures the best execution, meaning you are more likely to get the price you asked for.
Interactive Brokers has low stock borrowing fees, ranging from 3.90% (under $25k) to 3.02% ($3.5M). Stocks trading below $5 on an exchange are subject to the same margin requirements and fees as other exchange-traded stocks (Long positions: 30% or $2,000, whichever is greater. Short positions: $2.50 per share or 100% of the stock value, whichever is greater.) OTC stocks, including delisted exchange stocks, don't qualify for trade margins and thus require a 100 percent buying price. However, Interactive provides access to ATSs like ArcaEdge, which may allow margin trading.
Buy penny stocks in the UK with Interactive Brokers
In addition to small-cap listed stocks, Interactive Brokers provides access to the following OTC markets:
- OTC Markets Pink (PINK) – Access thousands of stocks trading on the Pink Sheets.
- ATSs – ArcaEdge.
IB also allows traders to trade directly over-the-counter with its ECN service. Separate fees will apply.
Step 1: Open your Interactive Brokers account Firstly, get started by opening your Interactive Brokers trading account by clicking here. The platform also offers an investment app allowing you to trade on your smartphone. Once your account is active and funded, move on to step 2.
Step 2: Access OTC Markets and ArcEdge In order to trade penny stocks, you will have to access OTC Markets and ArcEdge then add United Kingdom (Penny Stocks) to your trading profile. On the OTC Markets Pink Sheets, many stocks trade well above £5. When we use the stock screener to set £5 as the maximum amount to trade only penny stocks, Morningstar ratings do not appear. Unlike the stocks with higher prices, most of the penny stocks will not have any analyst following.
Step 3: Invest in Penny Stocks With Interactive Brokers Even if the broker provides a profile, always check the stock profile directly on the OTC bulletin board. In this example, the stock is not compliant with securities regulations and is in bankruptcy.
Step 4: Click on trade Finally, place your penny stock order and you will have successfully bought penny stocks.
- Low trading fees
- Large universe of OTC stocks to trade
- Access to major OTC markets, including ATSs
- Unfriendly user interface
Factors to consider when choosing a penny stockbroker
Over 10,000 OTC stocks are listed, and many of them are penny stocks with a high probability of failure. While shopping for a penny stock, you can reduce risk by taking these factors into consideration:
- Regulated broker – Brokers must register with the Financial Industry Regulatory Authority (FINRA) to trade stocks on OTC markets.
- Regulated OTC markets – OTCBB and OTC Markets boards are regulated, pricing is transparent and reporting and trading infractions publicly reported.
- Choice of penny stocks – A large number of penny stocks makes it easier to develop a diversified portfolio. More importantly, the penny stocks should have good liquidity.
- Transparency – Alternative trading systems (ATS), also known as dark pools, hide stock price, and trading volume. These can be risky, murky places for beginner traders.
- Fees – Low fees are more important when buying penny stocks. On cheap stocks, fees and commissions can easily eat away at your profit.
- Penny stock surcharges – Some brokers will charge an extra fee to trade penny stocks.
Where can I find penny stocks?
The US markets are nirvana for a small company seeking to raise capital, but few can afford the high listing fees of the big exchanges or the complex SEC regulations. Small companies around the world that dream of gaining access to the large pool of retail and institutional investors which trade US markets have another option – the OTC markets. These companies can gain an exemption from the regular cumbersome listing process by listing on the OTC markets.
Investors must open a broker account with an online broker to access these small-cap stock markets. Not all brokers will offer penny stocks or OTC trading. Penny stocks trade in the following markets:
- National Securities Exchanges – Stocks whose value has fallen below $5 are technically penny stocks. If their price falls below $1, though, they can be delisted from the large exchanges. Operator: NYSE, NASDAQ, and other large exchanges
- OTCBB – The OTC bulletin, operated by the securities regulator FINRA, lists OTC equity securities. Securities listed on the three large OTC markets operated by private firm OTC Markets may co-list on the OTCBB. Operator: FINRA
- OTCQX – You will find a menagerie of stocks here, ranging from well-known to newly formed companies with no revenues. Foreign bluechip companies wanting to access the US capital markets trade on the QX. They comply with the rigorous registration process by the SEC. OTXUS stocks cannot be penny stocks. Operator: OTC Markets
- OTCQB – The Venture Market is where early-stage and developing companies that do not meet full securities listing requirements trade. These companies are still required to meet regular reporting and verification requirements. A minimum bid of $0.01 must be met. Operator: OTC Markets
- Pink Sheets – The Pink Open Markets, known to traders as the pink sheets, list a wide variety of companies. You will find mid-caps and small caps, as well as companies that are bankrupt or delisted from big boards due to non-compliance with securities regulation. Companies self-list and do not adhere to full disclosure requirements. Operator: OTC Markets
- Gray Markets – These alternative trading systems (ATS) are OTC markets other than those run by OTCBB and OTC Markets. They have FINRA-assigned stock symbols and are required to report their trade data to FINRA. They include the NYSE-backed ArcaEdge, Citi Match, and Chi-X Europe. Large institutional traders trade in these markets known as dark pools because the trading price and volume are not disclosed.
You may gain access to these markets through a licensed broker-dealer who acts as your counterparty and trades directly with these markets on your behalf. Alternatively, for expert traders, some brokers also offer an ECN service through OTC Link. An ECN enables you to trade directly with your trading counterparties and negotiate trades through instant messaging.
How to spot penny stocks on the rise
Stock profiles provided by online brokers and investment sites (Yahoo, CBSMarketWatch, Bloomberg) are an important research tool for the DIY investor. Unfortunately, penny stocks are not widely covered by these investment sites or analysts. One of the most helpful is OTCBB.com, which has filled the void on info on penny stock investing. Here are ways to research penny stocks and find the best penny stock investments.
- OTCBB – Go to OTCBB.com and click on the Directories page. Enter the symbol you want to research, or view a list of all OTCBB securities and click on the company you want to research.
- FINRA – OTCBB operator FINRA provides key data on OTC stocks. Check out:
- Trading Halts – Discover if a trade is subject to a ‘Halt’ or ‘Trade Resume.’
- Market Statistics – Here, you will find data on the Top 100 Issues, Most Active By Share Volume, Gainers, Losers, and so on.
- Short Interest Data – The number of stocks shorted is an important indicator of market sentiment towards a stock. If there is a high number of short positions, the market sentiment is negative.
- Online brokers – Some online brokers will provide stock profile pages for OTC stocks. The information is typically sparse compared to that provided for an exchange-traded stock, and may be limited to basic trading data. No credit ratings or analyst coverage will be available.
- Company Information – It is in the best interest of companies to take steps to communicate with investors, even if they are not required to file detailed financial reports. A company may voluntarily file additional information in financial reports, be audited on a regular basis, or have independent analysts provide reviews. A company planning a big board listing will accelerate steps to comply with exchange-listed stock requirements.
Best penny stocks to buy for 2021
If you’re looking for hot penny stocks to buy, rest assured – we have compiled below a list of the top penny stocks on the rise for 2021. These are penny stocks with a huge potential to increase in value in the coming months:
- Castle Brands (ROX): This international marketer of premium alcoholic beverages is one of the best penny stocks to buy for 2010. Currently trading at only $0.58, the ROX stock has significantly increased in value in the first quarter of 2020 and we expect the upward trend to continue in the next coming months.
- Sportsman’s Warehouse (SPWH): This outdoor sporting goods operates in 25 states in the U.S.A. The SPWH stock price exploded recently following a new credit card deal allowing their customers to sign up for a credit card through them. Currently at around the $5 mark, we expect the stock to rise consistently by 2021.
- Limelight Networks (LLNW): Limelight Networks is an online content delivery provider which is still fairly new. With revenues for 2021 expected to increase by between 1% and 12% by 2021, LLNW is definitely a penny stock to watch in 2021.
Cheap penny stocks to buy
If you’re looking to invest in penny stocks but have a very limited budget, we would recommend to go for penny stocks under $1. The following 5 penny stock investments are a great opportunity and are the cheapest in the market at this moment in time.
- Sequans Communications (SQNS). Stock price $0.84
- Tetraphase Pharmaceuticals (TTPH). Stock price: $0.35
- Surge Energy (ZPTAF). Stock price $0.97.
- Trican Well Service (TOLWF). Stock price: $0.75
What to look for in penny stocks?
i) Stock symbol ending in ‘E’
When an E appears at the end of an OTCBB traded stock symbol, it means the company has not met a reporting requirement. These companies will be listed under Delinquency Reports. The company can be delisted within 30–60 days if it does not comply.
ii) Stock symbol ending in ‘Q’
A company with a Q at the end of its stock symbol is in bankruptcy. It will also appear under the Bankruptcy list. This stock is considered a high-risk investment because it will be more difficult to sell and may never rise above its financial woes.
iii) A skull and bones
On OTC Markets, a skull and bones beside a stock is a warning the company is not in compliance with securities rules.
iv) Bid-ask spread
The spread is the difference between the bid and ask price. Penny stocks have wide bid-ask spreads.
v) Trading halts
Penny stocks are frequently subject to trading halts when they fall below minimum stock price thresholds, but they also frequently resume trading. Check the stock’s Trade Halt history on FINRA. A stock that has not experienced trade halts is less likely to be delisted than a stock with frequent trade halts.
Unlike stocks listed on major exchanges, penny stocks do not have to meet listing or financial requirements to get a stock symbol, nor are they subject to shareholder approval rules. The lack of disclosure significantly increases the investment risk of these speculative stocks. Investors should conduct extra due diligence to minimize the risk of loss of capital. We recommend users to do their research before buying penny stocks and research well the company as well as the broker they are looking to invest in penny stocks with. Although risky, penny stocks can be a great investment opportunity and have the potential to generate great returns.
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Glossary Stock Terms
A stock is a representation of a company’s equity. When a company wants to raise capital, it issues stocks to the public. It is the aggregation of the total stocks owned by one individual that inform their shareholding of the company.
A share is an indivisible unit of capital that expresses the ownership relationship between a shareholder and a particular company, mutual fund, REITs or limited partnership. A share indicates a portion of ownership (claim) that one has on a company or fund.
Dividend refers to the portion of the company’s profits that is distributed to its stockholders. It can be on a quarterly or annual basis.
A bull market is an economic condition where the stock markets are in an extended period of consistent increase in stock prices.
A stock market is said to be bearish if it is involved in extended periods of continuous price decrease of the stock prices.
A stock exchange is an institution or a platform where shares and stocks and a host of other money market instruments are traded.
The return on investment is the profit you make from trading in or investing in shares and stocks of a particular company. It often comes from selling the investment at a higher price than was originally bought or benefiting from dividends and other profit-sharing schemes as a result of owning and holding onto a particular investment.
A broker may be a person or entity that engages in the buying and selling of different types of investments on behalf of other individuals or entities at a fee (or commission).
Day Trading is the practice of buying a money market investment product and selling it as soon it reports price increase or loss, within the same day. Traders engaged in day trading are referred to as “day traders” or “active traders”
Arbitrage is the act of buying and selling security at different stock exchanges or markets with varying prices. If, for instance, stock ABC sells at $11 on one exchange and $11.75 on the other, arbitraging involves buying from at the low price exchange and profiting by selling it at the higher-priced exchange.
A stock index is a statistical measure of the change in the stock and securities market. It comprises a hypothetical portfolio of different companies whose change in prices is calculated to determine market performance.
The Initial Public Offering refers to the sale of company stock to the public for the first time. It is the act of taking a company public and is highly regulated by such financial regulators like the SEC in the USA and FCA in the UK.
Options are derivative financial instruments whose price is based on the value of their underlying tradable security like shares and stocks. They are contracts that give the holder an option to buy or sell the underlying asset at a later date. Unlike futures, an options contract holder has the choice to buy/sell or not.
This is an options contract that gives the holder an option to buy the underlying asset before the expiry date.
This option gives its holder the choice of selling the underlying asset before its expiry date
A mutual fund refers to a company that pools funds from different investors and invests these funds in stocks, bonds, and other financial market securities. They then distribute the capital gains from these invests to their members.
The process through which stocks for companies that are not listed with accredited stock exchanges like the NYSE are traded. It is a broker-dealer network for unlisted stocks for companies that do not meet listing requirements set by the organized exchanges.
A stock is said to be overbought if it is traded excessively over a short period of time and at unjustifiably high prices.
A stock is said to be oversold if it is consistently traded below its true value.
Also referred to as the offer or asking price, this refers to the lowest price that the seller will take for a stock.
Bid price refers to the maximum price that a buyer is willing to pay for a stock.
In the stock trading context, Volume refers to the number of shares that change hands within a given period of time, be it a day, month or annually. It is trading/investment indicator where rising trade volumes point to a healthy stock while dwindling volumes are indicators of investor pessimism towards a stock.
Refers to the statistical measure of the change in price of a stock over a given period of time. It is a measure of the rate and the time it takes for a stock price to move from high to low and how long it remains within a certain price range. The higher the volatility, the higher the risk.
This refers to the highest closing price recorded by a given stock in the last 52 weeks.
This refers to the lowest closing price that a particular stock recorded in the last 52 weeks.
The bid-ask spread refers to the difference between the lowest price that a seller is willing to take for their stock and the highest price that a buyer is willing pay for the stock. It is the difference between the quoted ask and bid prices.
A market order is an instruction by an investor to the broker or brokerage platform asking them to buy/sell a stock or any other security at the best price available at that moment. It is often issued when an investor wishes to enter or exit the market quickly and at the prevailing rates.
A limit order is an order that triggers a sale or buy when a predetermined or better price is met. For a buy limit order, the buy order is executed once the set limit price or a better price is triggered. The sell limit order on the hand triggers the sale of stocks if the limit price or better price is hit.
Also referred to as a stop loss order, it is an order that triggers a buy or sell action once a predetermined price level is hit. It is designed to help you minimize possible loss on a given trade should the markets move against your bet.
Take profit is a type of limit order dictating the price level at which the broker or brokerage platform is to close a trade for profit.
Capital gain refers to the value rise of a tradable financial instrument that makes its selling price higher than the buying price. It can also be referred to as the profit realized from liquidating a capital investment like stocks.
An ETF is a collection of many tradable instruments like bonds, stocks, and commodities. These are listed on the exchanges and traded like ordinary stocks.
The debt-to-equity (D/E) ratio is a financial ration tool used to measure the financial health of a company by gauging value of its equity in relation to debt. It is achieved by dividing the company’s total liabilities in relation to its shareholder’s equity.
This is an investment strategy where the investor only buy shares that have consistently paid out high dividends in the past or others with the fastest dividend rates. Dividend investing strategy advocates are more interested in how much a shares pays in dividends than its price fluctuations.
Growth stocks refers to the stocks of companies that are expected to grow at a faster rate than the industry average and report consistent and sustainable cashflows. The company sales and revenues are also expected to increase at a faster than that of an average company in the same industry.
These are also referred to as micro-cap or nano-cap stocks and refers to the stocks of relatively small companies valued less than $5 and only trade via the Over-The-Counter markets.
A blue chip refers to a nationally recognized and financially sound company with a long and stable record of consistent growth. It is company whose financial might and nature of operation make it well suited to face turmoil and remain profitable in the uncertain economic conditions..
Short selling is a trade/investment strategy where the investor is banking on the decline of the shares of a particular company. They therefore borrows these shares, sells them at the current market price and buys them back after they lose value, effectively profiting from the price difference.
Yield refers to the profit/earnings generated from investing in a particular stock or market instrument over a given period of time and is expressed a percentage of the stock’s market value, face value or as percentage of invested amounts.
Capital stock, also referred to outstanding shares, refers to all the regular shares issued by a company and held by all its shareholders including the restricted/locked-in shares held by company insiders, executives, and institutional investors. The number of capital stock is used in calculating key metrics including cash-flow per-share and earnings per share.
EPS refers to the monetary value, the profit or earnings attributable to each outstanding shares held by a company. It is a financial ratio that is arrived at by dividing the company’s profit by its outstanding shares of the common stock.
Also referred to as Price-to-earnings ratio, PER is a financial metrics tools used to check if a company’s shares are over/undervalued by dividing the shares current market price with its earnings-per-share.
A company’s flat refers to the number of regular shares issued to investors that are available for trading. The float shares figure is arrived at by subtracting the locked-in shares held by company insiders and executives from its capital stock.
Gap up stocks refer to company stocks that open the day trading at relatively higher prices than their previous day’s closing price. This is often attributed to the after-market trading activity.
Gap down stocks refers to company stocks that open the day trading at relatively lower prices that the previous day’s closing price. For instance if a company stock closes the day trading at $50 but opens the following day trading at $45, it is said to have a 5-point gap down.
Stock buyback, also referred to as share repurchase, occurs when a publicly listed corporation uses a part of its revenues to buy back its shares from the marketplace. The move effectively reduces the number of company shares in circulation, which translates to an increased share price.
HOLD is a financial recommendation issued by a qualified financial institutions or financial analyst advising investors/traders not to buy or sell a particular stock. It is a no-action situation where long position traders are advised not to sell and others investors advised not to buy into the stock.
This refers to the upper-most price level that a particular stock or any other security reaches but doesn’t exceed due to dwindling number of buyers and an increasing number of sellers.
Is a branch of economics that’s concerned with the study of how the economy and different large-scale markets are structured, how they behave, and how they perform.
Relative Strength Index is a technical momentum indicator used in market analysis to determine if a stock is overbought or oversold by measuring the magnitude of a recent bullish or bearish price run. It has a scale of 0-100 where RSI readings of 70+ indicate a stock is overbought while an RSI reading below 30 is an indicator of an oversold security.
Moving Averages is a statistical calculation that is specially designed to identify the arithmetic mean of a given number of data sets or range of prices calculated over a given period of time. Each of these data set or price range is created by the average/mean price for that subset. For instance, a single data point on a moving averages scale may represent the average stock price for a day or trading session.
Bollinger Bands are a technical indicator tool characterized by two statistical carts that run alongside each other indicating the changes in prices and volatility of a financial instrument like stock or commodity over a given period of time.
Fibonacci retracements refer to two horizontal lines that use the Fibonacci numbers to measure the percentage of price retracement in a bid to indicate where the resistance and support are most likely to occur.
How much do I need to start investing in penny stocks?
There is no minimum amount needed to invest in penny stocks. Online brokers will have a minimum deposit but some allow you to start trading with as little as $5–10. A high minimum investment may force you to invest an imprudent amount in penny stocks.
Can I buy OTC stocks directly from OTC bulletin boards?
To buy OTC stocks, you must open a broker account with a FINRA-registered broker-dealer. You can then trade OTC stocks in the same way you trade exchange-traded stocks. For expert traders, some brokers offer the option of trading directly with OTC counterparties through an ECN.
Why do I not see the best bid and ask prices for an OTC stock?
Markets in penny stocks can be very illiquid. To obtain the best bid and ask quote, two bid and two ask quotations are required. One-sided quotes are not uncommon.
Is my investment safe on OTC markets?
If you trade through a licensed and insured broker, you will have up to $500,000 in SIPC-backed insurance against losses on your investment account.
What happens when my stock falls below $1?
If you have invested in an NYSE or NASDAQ stock that falls below $1, the stock will be delisted from the exchange. The stock may then trade in the OTC markets.
Are OTC brokers ethical?
Penny stock markets have long been a target of illegal investing practices, including pump-and-dump schemes. To deal with securities listed in the OTCQB, OTCQX or OTC Pink boards, a broker must be registered with FINRA and the SEC. These brokers must comply with securities rules, including ensuring investors receive: Best execution Limit orders Firm quotes Short position disclosure
What is an alternative trading system (ATS)?
An alternative trading system (ATS) is an electronic OTC system that matches buyers and sellers of securities. They are also referred to as dark pools due to their lack of transparency as they mask the price and size of orders.