How to Trade Penny Stocks

Unless you are an experienced investor comfortable with highly risky investments, we do not recommend that you trade penny stocks. If you still plan to trade penny stocks, focus on minimizing trade commissions and fees, and pay attention to trading restrictions that online brokerages may impose on penny stock trading. These kinds of stocks can wind up costing a pretty penny after you factor in base trading fees and surcharges depending on the online brokerage you transact with.

Based on our study, SogoTrade, Merrill Edge and Fidelity ranked as the three best brokers for penny stock trading, based on the cheapest cost to trade. Charles Schwab ranks with the fourth lowest, with e*Trade, TD Ameritrade and Tradestation collectively tying with the fifth cheapest trading costs for penny stocks.

Trade Commissions and Fees for Penny Stocks

Penny stock trades generally involve large number of shares due to the lower price per share. To minimize trading costs, an investor interested in penny stock trades should either choose an online brokerage that charges a flat trading fee,or an online brokerage that charges a very low base fee and very low surcharge for penny stocks. In our survey of brokerages, six out of fifteen do not assess a surcharge for penny stock trades. This list includes e*Trade, Charles Schwab, Merrill Edge, Fidelity, TD Ameritrade and Tradestation. Out of the six, Merrill Edge leads with the cheapest base-trade fee, but also imposes a restriction 20% account value for penny stocks held by an investor.

Online Broker Fee per Trade (Stocks, ETFs) Penny Stock Surcharge & Notes
e*Trade $9.99 No surcharge for penny stocks
Charles Schwab 8.95 No surcharge for penny stocks
Merrill Edge 6.95 No surcharge for penny stocks; Trading volume restriction: no more than 20% of account value in penny stocks
Fidelity  7.95 No surcharge for penny stocks
TD Ameritrade 9.99 No surcharge for penny stocks
Tradestation 9.99 No surcharge for penny stocks
WF WellsTrade 8.95 Greater of $34.95 or 3.5% of principal for stock valued below $1
T. Rowe Price 35.00 For stock valued below $1, if principal under $10,000:0.04% of principal + $35. If principal above $10,000: 0.03% + $35. Fee per trade for penny stocks at T. Rowe is $35, and not the same as its fee per trade for stocks and ETFs at $19.95
Scottrade 7.00 Base fee + 0.5% of the principal for stock valued below $1
TradeKing  4.95 Base fee + $0.01 per share for stock valued below $2; Online trading on domestic pink sheet and bulletin board stocks is limited to variable dollar and number of shares amounts. Online trading limits vary depending on the stock, its volume and liquidity
Capital One Investing (Sharebuilder) 6.95 Base fee + $0.007 per share when the price per share is less than $1. The base commission plus surcharge has a maximum of $500 or 15% of the principal amount of the trade, whichever is less (but no less than the base commission). 
optionshouse 4.95 Base fee + $0.005 per share for stock valued below $2
Firstrade 6.95 Base fee + $0.005 per share for stock valued below $1
SogoTrade 5.00 Base fee + $0.0003 per share for stock valued below $1; For stocks priced under $1, $100 minimum investment (principal) required per opening transaction. OTCBB and Pink Sheets may incur additional transaction fees based on DTC charges.
TIAA-CREF Self-Directed Brokerage 14.95 Orders to buy shares priced under $1 will not be accepted; Orders to sell shares priced under $1 are handled by brokers and charged $14.95

Best Penny Stock Brokers for Volume Trades

We compared fifteen online brokerages to see how they stack up based on the volume of shares traded. We assumed that the penny stock is valued at $0.90 per share, and compared the cost to trade for three different trade volumes - at 500 shares, 1,000 shares and 2,000 shares. SogoTrade’s cost to trade is lowest in all three scenarios, even though the brokerage charges a surcharge for penny stocks. This is due to the combination of a low base fee and a very low surcharge per share. Aside from SogoTrade, the six brokerages that do not assess a surcharge for penny stock trades become more attractive options as an investor increases the share volume of the trades.

Below are the costs to trade penny stocks based on our assumptions below. The majority of these providers had some kind of restriction or another.

Online Broker Base Trade Surcharge per share, or % of principal Cost for 500 Shares Cost for 1,000 Shares Cost for 2,000 Shares
SogoTrade $5.00 0.0003 $5.15 $5.30 $5.60
Merrill Edge 6.95 N/A 6.95 6.95 6.95
Fidelity  7.95 N/A 7.95 7.95 7.95
Charles Schwab 8.95 N/A 8.95 8.95 8.95
e*Trade 9.99 N/A 9.99 9.99 9.99
TD Ameritrade 9.99 N/A 9.99 9.99 9.99
Tradestation 9.99 N/A 9.99 9.99 9.99
optionshouse 4.95 0.0050 7.45 9.95 14.95
Scottrade 7.00 0.0050 9.25 11.50 16.00
Firstrade 6.95 0.0050 9.45 11.95 16.95
Capital One Investing (Sharebuilder) 6.95 0.0070 10.45 13.95 20.95
TradeKing  4.95 0.0100 9.95 14.95 24.95
T. Rowe Price 35.00 0.0004 35.18 35.36 35.72
WF WellsTrade* 8.95 0.0350 34.95 40.45 71.95
TIAA-CREF Self-Directed Brokerage 14.95 N/A N/A N/A N/A

What Are Penny Stocks?

A penny stock is a low-priced common stock trading below $5 a share, and can commonly refer to stocks trading below $1 per share. These stocks are generally from small-capitalized companies, and do not trade on major exchanges like the NYSE and NASDAQ. Penny stocks are typically traded Over-the-Counter (OTC) or through Pink Sheets, and perceived as less liquid than stocks traded on the major exchanges. With little liquidity available, the spread between the bid and ask price can be vast and the stocks are often targets for speculators.

“Pump and Dump”

Due to the the lax oversight of penny stocks, these shares are frequently targeted by speculators. “Pump and dump” operations refers to penny stock shareowners who aggressively promote the stock through email, newsletters and chatrooms to increase the stock’s value before ultimately dumping the stock for a profit.

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