Best Brokers For Penny Stock Trading of 2017

For most investors, a simple buy-and-hold portfolio of index funds is the way to go. The majority of my own portfolio, which I’ve been managing for nearly 10 years now, is in stable and diversified investments like these. But I’m also a bit of an adrenaline junkie and geek-out on investment research, so I enjoy trading in the high stakes world of small and low-priced companies (a.k.a “penny stocks”) with a limited amount of cash, too.

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Best Overall

The easiest way to lose out on penny stock profits — aside from making bad trades — is paying unnecessarily high broker fees. The best brokers for penny stock trading don’t tack on any additional fees for trading a high volume of low-cost stocks.

Charles Schwab offers the most reasonable penny stock rates of any broker. It’s also a great platform to expand your portfolio outside of penny stocks, too. Its online educational resources are second to none, and it offers 200 commission-free ETFs to help you further grow your portfolio. E*Trade’s pricing structure becomes less expensive than even Charles Schwab after 313 trades per quarter, however. If you’re an active trader and regularly hit those numbers, that will be your best option.

The Simple Dollar’s Top Picks for the Best Penny Stock Brokers

I looked at all the hidden fees or surcharges that many brokers like to tack on to penny stock trades, and found the ones that had the absolute lowest rates available.

Best Overall: Charles Schwab

Best for Active Traders: E*Trade

Not all “penny stocks” trade for a penny a share. Some trade for a little less than a dollar and some even trade for less than a penny at a fractional value per share. But regardless of specific price, any true penny stock is going to be an ultra low-priced investment on a per share basis.

You need to keep your cost per share as low as possible to trade penny stocks effectively.

Let’s say you only have $500 to invest in penny stocks. In theory, you can buy 50,000 shares of a stock priced at 1 cent per share.

But in practice, there are going to be costs to any transaction. Let’s say your broker charges $10 to place a buy order and then another $10 to place a sell order. Minus those fees, you actually only have $480 to invest.

And what if there are additional $30 costs specific to low-priced stocks because your broker isn’t very welcoming to aggressive penny stock investors? Now your $500 has turned into $450.

In the grand scheme of things, $50 may not sound like a deal breaker. But that’s actually 10% of your initial $500 investment. And worse, that 10% is only lost on the front end. It can add up big-time in lost profits.

Consider the following math based on a $500 initial investment:

5% $475 $950 $450 90%
7% $465 $930 $430 86%
10% $450 $900 $400 80%
15% $425 $850 $350 70%

As you can see, it’s not just the lost money thanks to fees that matter, but the lost investment profits, since you can’t put that cash to work in the stock market after your broker takes a cut.

What Makes a Good Penny Stock Broker?

There’s always risk to trading stocks, and a lot of the big factors that can result in a big move for the market or an individual company are not within your control.

The one thing you can control to some extent is broker fees.

That’s why I read through the fine print of the 10 most popular discount stock brokers. Including my top pick platforms, Charles Schwab and E*Trade, I explored:

  • TradeKing
  • Scottrade
  • TD Ameritrade
  • OptionsXpress
  • Lightspeed
  • Interactive Brokers
  • Merrill Edge
  • Robinhood

Here’s what I looked for, specifically:

No Surcharges for Low-Priced Stocks: Many discount brokers tout their “standard” transaction fees in marketing, but neglect to tell you there can be an added cost to low-priced securities. Some brokers charge a percentage on the total trade value and others charge a fee per share. Either way, you’re getting charged way more than you would for a regular blue chip stock like Apple Inc. or Wal-Mart Stores Inc. at standard rates.

Reasonable Volume Restrictions: If you find a stock you like trading for 1 cent and want to invest $1,000, you’ll be purchasing 100,000 shares. That means any broker that either charges you for large trades or insists you break them up into multiple orders is not conducive to penny stock investing. I insisted platforms allow block orders of more than 1 million shares to be subject to additional fees – meaning you can invest $9,999.99 in that 1-cent investment via a single transaction and not get dinged. That’s plenty for most investors.

No Costly Add-Ons: Penny stock investing is inherently aggressive, so some brokers demand you upgrade to a premium trading account with higher minimum balances or additional platform fees. Others require you to place orders via telephone to a human broker, which typically can add $25 or more in service charges. If you want to trade penny stocks, you should be able to do so without additional costs and headaches like these.

Low Minimum Account Balance: Typically, penny stock investors are seeking out these low-priced securities because they don’t have a ton of ready capital they’re willing to risk on them. That means it’s necessary for a good penny stock broker to have a low initial account minimum. But thanks to the very volatile nature of these aggressive investments, it’s not uncommon for penny stock traders to see their initial nest egg shrink in a hurry — so it’s important those low minimum requirements persist beyond sign-up, just in case a trade goes wrong (because at least one or two probably will). I don’t think anyone with less than $1,000 should be investing in individual stocks of any kind, frankly, so I used that as a reasonable minimum threshold.

The Best Penny Stock Brokers

Best Overall

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Cost Structure

  • Trading fees: $8.95 flat rate
  • Balance Requirements: $1,000 minimum to open, but no ongoing balance requirements after sign-up
  • Volume Restrictions: Up to 1 million shares per transaction without additional cost

Charles Schwab’s commitment to a transparent fee structure works strongly in favor of those who want to invest in low-cost securities. There are no hidden fees per share, and no pesky maintenance fees to endure.

This is a bit of a rarity when it comes to penny stocks. Many brokers charge you extra to invest in low-priced stocks, or to place large block orders. Take OptionsHouse, which I named as one of the best options brokers because of its super-low fees. In the fine print, however, OptionsHouse says it will charge you $0.0005 per share on penny stocks – which means if you’re investing $500 in a 1 cent stock, you’ll be buying 50,000 shares and incurring $25 in fees per transaction.

With Charles Schwab you can confidently trade penny stocks knowing you’ll only be charged $8.95 to buy and $8.95 to sell – with none of the additional fees so-called discount brokers place on high-volume penny stock trades. You just need at least $1,000 to start investing; however, you should really have that much to get started trading successfully through any broker.

A Trusted Resource for Beginners

Since Charles Schwab is one of the oldest and most respected brokers out there, your investing adventures don’t have to be limited to penny stocks either.

After changes to investing regulations in 1975 allowed brokers to be more flexible with fees, Schwab offered much lower fees than its peers and helped to create the discount broker marketplace that exists today by putting its customers first.

If you’re a beginner, Charles Schwab will have everything you need to expand your portfolio.

That populist approach to investing is very much in the DNA of Charles Schwab today. Want to learn about, say, exchange traded funds? Then check out the tons of articles, videos, and on-demand courses in the Learning Center. There also may be a seminar available at a brick-and-mortar Charles Schwab branch near you, which you can attend free of charge as an account holder. That kind of personal attention simply isn’t there from other online-only platforms. Also, when you’re ready to place your first ETF trade, Schwab ETF OneSource offers 200 commission-free ETFs to allow you to dabble in these funds in a cost-effective way, even as you trade penny stocks. This is just one example of how having a big broker like Schwab on your side can open doors to new trading strategies as you learn and grow as an investor.

Best for Active Traders

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Cost Structure

  • Trading fees: $6.95 flat rate, $4.95 for 30+ trades each quarter.
  • Balance Requirements: $500 minimum to open, no ongoing balance requirements after sign-up
  • Volume Restrictions: Up to 1 million shares per transaction without additional cost

For beginner and veteran investors alike, transparency matters. And like Schwab, E*Trade offers a straightforward pricing model for penny stocks — it’s just not as cost-effective until you reach a relatively high number of quarterly trades. After 30 transactions each quarter, you’ll only be charged $4.95 per trade instead of $6.95.

Those discounts are tremendous when you consider the competition’s pricing for active traders.

Let’s say you execute 500 transactions in the quarter for about 50,000 shares each. That adds up to about a $500 transaction around a stock trading for 1 cent, so we’re talking a lot of modest trades and not six-figure investments.

Here’s how the math would differ on E*Trade vs. a typical fee structure like that of OptionsHouse, which tacks on a per-share charge.

E*Trade Commission Structure

Your transactions Fees Subtotal
First 30 trades $6.95 per trade $208.50
Next 470 trades $4.95 per trade $2,326.50

OptionsHouse Commission Structure

Your transactions Fees Subtotal
500 trades $4.95 per trade $2,475.00
50,000 shares per trade $0.0005 per share $12,500.00

As you can see, the flat rate is nominally lower with OptionsHouse, but since the stock costs just a penny, you’re trading a high volume of shares and can really rack up its extra fees if there’s a per-share expense above your standard commission.

One thing to note: E*Trade acquired OptionsHouse in late 2016, but according to this released statement there will be no changes to OptionsHouse pricing or trading platforms.

Make Sure You Do the Math

The potential for a volume discount coupled with a lack of additional penny stock fees is too powerful to ignore. Sure, the $6.95 flat rate seems pricey when compared with most standard rates. And obviously, if you’re only making a handful of trades, Schwab is a better fit.

The absolute break-even between Schwab and E*Trade is 313 trades per quarter, but the savings get more pronounced the more you trade, as the chart below shows.

100 Trades $895 $555
200 Trades $1,790 $1,050
300 Trades $2,685 $1,545
400 Trades $3,580 $2,040
500 Trades $4,475 $2,535
1,000 Trades $8,950 $5,010

The most important thing for active traders, then, is to review their transaction history for a three month period and see if they perform more than 300 trades or so. If the answer is yes, then E*Trade is going to be the best penny stock broker for you, strictly based on the volume discounts.

Fees Are Important, But So Is Research

If all this talk about fees and figures has your eyes glazing over, then I have bad news for you – penny stock investing is particularly hazardous to people who don’t like numbers. That’s because your success in trading them relies solely on your own ability to research them. The vast majority of penny stocks operate under the radar of professional Wall Street analysts, which makes them incredibly hard to predict.

Consider that Apple Inc. has about 40 investment firms poring over its press releases and its public filings with the Securities and Exchange Commission. That’s not to mention the countless armchair investors sharing their opinions on blogs or social media about the company’s financials, too. And despite all this, there are still investors who have lost money on the stock by failing to anticipate the right time to buy and the right time to sell.

Penny stocks have almost no media and analyst coverage. That makes them incredibly risky and uncertain.

What’s worse, it is crucial to note that this lack of coverage doesn’t just lead to bad investments, but can also lead to outright fraud. Take the case of Daniel Ruettiger, the walk-on Notre Dame football player immortalized in the movie, “Rudy.” Ruettiger used his modest fame to start a penny stock sports drink company, and then fraudulently inflated its value to rake in $11 million in ill-gotten profits.

More recently, in March of 2016 the SEC fined a stock market “expert” after the guy took $330,000 in compensation from a struggling penny stock in exchange for constant touting of the firm on blogs, social media, and other outlets. These kind of “pump and dump” schemes are common among penny stocks, since the investments aren’t widely covered and it’s easy for a false rumor to take hold.

Remember these examples the next time you get a hot tip and think of just diving in without doing your own research. At a minimum, you should always search the SEC Edgar database for filings from a potential investment. By law, any stock – even penny stocks – has to report its gross sales, net profit, and potential risks to investors. I’d also highly recommend doing a few hours of simple Google research around the company and reading what blogs, press releases, and other investors are saying. You don’t have to agree, and it’s important to take all commentary with a grain of salt, but it’s important to at least know what’s out there.

Whatever your strategy, don’t let the allure of big profits fool you into just investing on a whim. Otherwise, you could find yourself on the wrong side of one of these scams, with fraudsters making millions, and you losing all of your money.

The Bottom Line

Penny stock investing is all about finding the best stocks at the lowest price, so you can’t afford to incur big-time fees and commissions. Charles Schwab offers the lowest standard rates on penny stock trading, and has a transparent pricing structure that makes it the best option for just about everyone. The only way to get even lower fees would be to use E*Trade and take advantage of its volume discounts.