Penny stocks are typically priced below $5 per share and trade on the over-the-counter bulletin board or through pink sheets and outside of the large exchanges. Because penny stocks don't have to meet the listing regimen of the major exchanges, information on these stocks may not even exist. The market for penny stocks tends to be illiquid, which makes them volatile and risky to trade. Opening a penny stock trading account can be performed online and takes only minutes. First you must find a reputable penny-stock broker.
Identifying the Brokers
Research and identify penny-stock brokers that have been well reviewed by established financial publications, such as "Barron's." Several online brokers -- such as Interactive Brokers, TradeMonster, TD Ameritrade and OptionsXpress -- are highly ranked by "Barron's" for their trading tools, trade execution, pricing and customer service and because they allow investors to trade over-the-counter bulletin board, pink sheets or penny stocks. Because reputable penny-stock brokers abound, you can be choosy and sign up with the broker that best suits your needs. Consider your trading strategy -- active daily versus infrequent trading -- and whether you need access to independent research. You may opt to pay more for better customer service and for access to a broker for trading advice.
Commissions and Fees
Because penny stocks are so cheap, a broker's commission and surcharges can make a big dent on your profits. If you use Fidelity, you'll pay $25 per buy and sell transaction, or a total of $50 on a penny stock trade. The same trade with Scottrade costs only $14. For frequent traders, commissions can amount to thousands of dollars each year. At the low end of the scale, TradeMonster charges $4.95 per trade and a surcharge of $0.0005 per share for a penny stock trade, but you might not have access to the research and trading tools offered by opening a penny stock account with Charles Schwab, for example. Paying $8.95 per trade with Schwab may be worth the access to research and 24/7 customer service.
Opening the Account
Many penny-stock brokers require a minimum account balance -- as little as $500 to as much as $25,000 -- to open a trading account. For example, Charles Schwab requires $1,000 to open an account that allows you to trade penny stocks. However, some credible penny-stock brokers -- USAA and ChoiceTrade, among them -- have no account minimums. As a subsidiary of Charles Schwab, OptionsXpress requires no minimum account balance, charges the same commission as Schwab and allows you to trade penny stocks. You can sign up for the account online and instantly access trading tools, webinars and online videos on trading strategies. Alternatively, you can call penny-stock brokers to open a new account.
Policies and Restrictions
Before you open the account with a penny-stock broker, check for policies or restrictions that impede your trading style. OptionsXpress doesn't allow you to short penny stocks -- a restriction that would cripple an active trader. Other brokers that prohibit short sales of penny stocks include TD Ameritrade, TradeMonster and ChoiceTrade, according to NerdWallet. Some brokers have a cutoff price for penny stocks. For example, ChoiceTrade doesn't allow you to trade stocks that are priced below a nickel.
Kay Tang is a journalist who has been writing since 1990. She previously covered developments in theater for the "Dramatists Guild Quarterly." Tang graduated with a Bachelor of Arts in economics and political science from Yale University and completed a Master of Professional Studies in interactive telecommunications at New York University.