Penny stocks are risky, low-cost investments that are shares of small companies trading outside major stock exchanges. Some brokers may add a surcharge to stocks valued below a certain dollar amount, like penny stocks. Definitions of penny stocks vary by broker, with some considering anything under $5 as a penny stock.
While penny stocks may seem like a bargain compared to higher-priced stocks, they are cheap for a reason. These stocks are issued by small, often unstable companies, making their values volatile and difficult to research. Additionally, penny stocks are more susceptible to “pump and dump” schemes due to less stringent financial disclosure requirements.
When choosing a penny stock broker, it is important to be aware of volume and trading restrictions that may affect your ability to trade effectively. Some brokers may impose limits on the number of shares you can trade in one order or in one day.
NerdWallet has compiled a list of top brokerages for penny stock traders, many of which also appear on their list of top online brokers for stock trading. These brokers offer a strong suite of features for penny stock trading and are well-rounded in their offerings.
It is important to understand the risks associated with trading penny stocks and to choose a broker that aligns with your trading needs and preferences.