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Penny stocks and how to invest in them

With potential for growth at a low cost, these investments can also be considered high-risk.

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By

Alison Banney

&

Ryan Brinks

Updated

Fact checked

Penny stocks are an inexpensive way to diversify your investments and could multiply over time. But they’re also very risky investments because the companies are usually small, unestablished and fighting an uphill battle competing against other companies in their market. And yet, who doesn’t like an underdog?

What are penny stocks?

Penny stock are small-cap stocks that can be traded for less than $5. Most penny stocks aren’t listed on a major stock exchange, though there are always exceptions. Instead, they’re usually issued by new and unproven companies and are thinly traded directly between buyers and sellers on decentralized over-the-counter (OTC) marketplaces.
The US Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) lay out rules for brokers who offer penny stocks on some OTC marketplaces.
Because these stocks are priced so low, traded less often and have little financial backing, they’re referred to as anything from penny stocks to OTC stocks to micro-cap stocks.

Exchange-listed penny stocks

There are plenty of well-known stocks listed on the New York Stock Exchange or NASDAQ that also trade for less than $5 but are not considered penny stocks. For example, Genworth Financial (GNW), Hecla Mining (HL), Office Depot (ODP), Groupon (GRPN) and GoPro (GPRO) all traded between $1.50 and $5 in June 2020, but have market caps close to or more than $1 billion.
In this case, the SEC classifies the stock more by its market cap than its price:

  • Large-cap: $10 billion+
  • Mid-cap: $2 billion to $10 billion
  • Small-cap: $300 million to $2 billion
  • Micro-cap: $50 million to $300 million
  • Nano-cap: Up to $50 million

Here are a few examples of penny stocks that are listed on major stock exchanges. Others include lesser-known pharmaceutical, tech and energy companies:

OTC penny stocks

The majority of penny stocks are found on OTC marketplaces. They don’t require minimum listing, so they’re easier to list on. The main OTC marketplaces include the OTC Bulletin Board (OTCBB) — regulated by FINRA, and the privately-owned OTC Link, which has three parts: OTCQB, OTCQX and OTC Pink.
Not all brokerage accounts offer access to the OTC marketplaces. Some brokerages allow trades on large, foreign OTC stocks but not on OTC penny stocks.
Here are a few examples of OTC penny stocks:

  • CV Sciences (CVSI), another CBD oil manufacturer.
  • Fannie Mae (FNMA), the government-sponsored enterprise officially named the Federal National Mortgage Association.
  • Frontier Communications (FTRCQ), the national telecom company.
  • JCPenney (JCPNQ), delisted from the NYSE in May 2020.
  • Medical Marijuana (MJNA), a CBD oil pioneer whose CEO was indicted in a real estate Ponzi scheme.
  • TPT Global Tech (TPTW), a telecom company deploying 5G in several central states.

Pros and cons of penny stocks

Some of the benefits and risks of investing in penny stocks are:

Pros

  • Low prices. Investors can hold a diversified portfolio of penny stock companies without spending a lot.
  • Potential growth. Newly listed companies can often present great growth opportunities if you pick the right ones. However, it could be a bumpy ride to the top.
  • Thrilling. Penny stocks often see quick, significant prices changes, which can be exciting for investors with a high risk tolerance.
  • Day trading. Because of their large price swings, penny stocks are often used by active day traders.

Cons

  • High-risk investment. Companies with penny stocks often come with a shorter financial track record compared to other listed companies and ETFs . Not all companies that list on an exchange do well, and a lot of penny stocks never become anything more.
  • Illiquid. Because they’re largely unknown, penny stocks are often hard to buy and sell and are vulnerable to manipulation like pump and dump schemes. Stocks could crash when investors push prices up drastically to draw in other investors, then sell out at higher prices.
  • Volatile. Similarly, penny stocks often experience extreme stock price highs and lows within a matter of days, or even within the same day.
  • Unregulated. There are much fewer, if any, standards that penny stocks have to abide by. With no requirements to file financial statements or to provide financial information, investors could be left in the dark.
  • No income. Penny stocks rarely pay any dividends, as all revenue is usually reinvested back into the company to help it grow.

Pattern day trading rule

FINRA has restrictions in place for day traders, placing limitations on your trading account if you qualify as a pattern day trader. While brokerages treat the rule differently, generally you’re considered a pattern day trader once you make four or more day trades within a rolling five-business-day period.
If that happens, your brokerage firm could prevent you from making further day trades. Set your account up for trading on margin and keep a balance of at least $25,000 to prevent being blocked.

Penny stocks vs. blue-chip stocks

The opposite of penny stocks are blue-chip stocks. Blue chips are large, listed companies that have been around for a long time and have an established, stable financial track record. Some of the biggest and most well-known companies are considered blue-chip stocks, such as Microsoft, Hershey’s and McDonald’s.
While penny stocks don’t pay dividends in most cases, blue chips almost always do.

Should you invest in penny stocks?

You could consider investing in penny stocks if you:

  • Have a high risk tolerance.
  • Are an experienced investor.
  • Are willing to cut your losses if the stock price falls significantly.
  • Have a long investment time frame and are willing to ride out the volatility.

Tips for investors considering buying penny stocks

If you think you can handle the risks of investing in penny stocks, here are some tips to help you get started:

Do your research

This is important for all investments, but particularly high-risk investments like penny stocks. Blue-chip stocks are a low-risk option, with a long history of strong financial performance.

Plan a strategy and stick to it

Before you start buying, decide how much you’re willing to spend and choose the penny stocks you want to invest in. And if the stock falls, decide on a price you’d sell.

Keep your portfolio balanced.

Penny stocks should occupy the high-risk portion of your total investment picture, and for most people, that’s a small segment.

Don’t let emotions guide your decisions

It can be easy to get emotionally attached to a penny stock, as they’re often the underdogs in your portfolio. But when the stock price continually falls, don’t make excuses as to why you should keep it — stick to your strategy and leave your emotions out of your decisions.

Don’t get sucked in by the “cheap” prices

Penny stocks may appear to be cheap compared to others listed on major exchanges, but don’t base your investment decision purely on price. Basic factors that influence a company’s stock price is the demand for its shares and the number of shares it issues. The less demand from investors or the more shares issued, the lower the stock price. So consider why penny stocks are priced so low.

How to buy penny stocks

  1. Choose a stock trading platform. If you’re a beginner, compare stock trading platforms, and explore the stocks they trade. Some platforms like Robinhood offer limited access to foreign and unlisted companies, so you likely won’t find the ones you’re looking for. Others, like Ally Invest, offer more OTC stocks, still with a limited selection. The platforms that are tailored to professionals, like Interactive Brokers, offer the widest selection of foreign and OTC stocks.
  2. Open your account. You’ll need your ID, Social Security number and details for an initial deposit.
  3. Confirm your payment details. You’ll typically need to fund your account with a bank transfer, though sometimes you can send a check.
  4. Find the stocks you want to buy. Search the platform for the penny stocks you want to buy. You could add safeguards like a limit order that locks in your maximum price so you won’t pay more than you expect.

Compare stock trading platforms for penny stocks

12 of 12 results
Finder Score Available asset types Stock trade fee Minimum deposit Cash sweep APY bullet point infobox
Finder score
9.4 Excellent
Stocks, Options, ETFs, Cryptocurrency, Futures, Event contracts, High-yield cash account
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8.2 Great
Stocks, Bonds, Options, Mutual funds, ETFs, CDs
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$250
2.83%
Leverage powerful trading tools and low margin rates to trade stocks, options, ETFs, mutual funds and bonds.
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9 Excellent
Stocks, Bonds, Options, ETFs, Cryptocurrency, Investments, Retirement, Treasury Bills, High-yield cash account
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*Yield as of 04/09/2025. Learn more.
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SoFi Wealth Management logo
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9 Excellent
SoFi Active Invest
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9 Excellent
Stocks, Options, Mutual funds, ETFs, Alternatives
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0.01%
Get up to $1,000 in stock when you open and fund a new account. T&Cs apply.
Trade stocks, ETFs, and options with zero commissions, invest in IPOs or automate your portfolio, with exclusive perks available through SoFi Plus.
Important information
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE Other fees, such as exchange fees, may apply. Please view our fee disclosure to view a full listing of fees. Investing in alternative investments and/or strategies may not be suitable for all investors and involves unique risks, including the risk of loss. An investor should consider their individual circumstances and any investment information, such as a prospectus, prior to investing. Interval Funds are illiquid instruments, the ability to trade on your timeline may be restricted. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA (www.finra.org) /SIPC(www.sipc.org). There are limitations with fractional shares to consider before investing. During market hours fractional share orders are transmitted immediately in the order received. There may be system delays from receipt of your order until execution and market conditions may adversely impact execution prices. Outside of market hours orders are received on a not held basis and will be aggregated for each security then executed in the morning trade window of the next business day at market open. Share will be delivered at an average price received for executing the securities through a single batched order. Fractional shares may not be transferred to another firm. Fractional shares will be sold when a transfer or closure request is initiated. Please consider that selling securities is a taxable event. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire investment Before trading options please review the Characteristics and Risks of Standardized Options Advisory services are offered by SoFi Wealth LLC, an SEC-registered investment adviser. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see https://www.sofi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information SoFi Plus members can schedule an unlimited number of appointments with a financial planner during periods in which the SoFi Plus member meets the eligibility criteria set forth in section 10(a) of the SoFi Plus Terms and Conditions. SoFi members who are not members of SoFi Plus can schedule one (1) appointment with a financial planner. The ability to schedule appointments is subject to financial planner availability. SoFi reserves the right to change or terminate this benefit at any time with or without notice. Advisory services are offered by SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease Robo Advisor: Automated investing is offered through SoFi Wealth LLC, an SEC-registered investment adviser. 0.25% fee is based on your account value. The wrap program fee may cost more or less than purchasing brokerage, custodial, and record keeping services separately. Terms and conditions apply*. For 401k rollovers, existing SoFi IRA members must complete 401k rollovers via this link For SoFi members without a SoFi IRA, a SoFi IRA must first be opened, and 401k rollover must be completed utilizing Capitalize via this link. SoFi and Capitalize will charge no additional fees to process a 401(k) rollover to a SoFi IRA. SoFi is not liable for any costs incurred from the existing 401k provider for rollover. Please check with your 401k provider for any fees or costs associated with the rollover. For IRA contributions, only deposits made via ACH and cash transfer from SoFi Bank accounts are eligible for the match. Click here for the 1% Match terms and conditions.
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Webull logo
Finder score
9.4 Excellent
Webull
Finder score
9.4 Excellent
Stocks, Bonds, Options, ETFs, Futures, Money market funds
$0
$0
3.60%
Deposit or transfer $100,000+ to earn a 4% Match Bonus, or $2,000+ to earn a 3% Match Bonus. Plus: Get a $100 transfer fee reimbursement on your first brokerage transfer of $2,000 or more. T&Cs apply.
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9.2 Excellent
Interactive Brokers GlobalTrader
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9.2 Excellent
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eToro logo
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8.2 Great
eToro
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8.2 Great
Stocks, Options, ETFs, Cryptocurrency, Investments
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3.75%
No commission stock, ETF and options trades, with 3.9% interest on your options account balance and no options contract fees. See full disclosure.
Important information
eToro securities trading offered by eToro USA Securities, Inc. (‘the BD”), member of FINRA and SIPC. Investing involves risk, and content is provided for educational purposes only, does not imply a recommendation, and is not a guarantee of future performance. Finder is not an affiliate and may be compensated if you access certain products or services offered by the BD.
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Acorns logo
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8 Great
Acorns
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8 Great
Stocks, ETFs
$0
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N/A
Get a $20 bonus when you set up an account and make your first recurring investment (min. $5). T&Cs apply.
Automate investing with recurring contributions starting at $5 and invest spare change from everyday purchases.
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Stash Investments LLC logo
Finder score
7.4 Great
Stash
Finder score
7.4 Great
Stocks, ETFs
$0
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0.1%
Get $5 when you sign up and deposit $5. T&Cs apply.
Bank, automate your portfolio or invest in individual stocks and ETFs for as low as $3 per month.
Important information
Investment advisory services offered by Stash Investment LLC, a SEC registered investment advisor. Investing involves risk and investments may lose value. Holdings and performance are hypothetical. *Offer is subject to T&Cs
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Wealthfront logo
Finder score
9 Excellent
Wealthfront
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9 Excellent
Stocks, ETFs, High-yield cash account
$0
$500
3.75%
Get a $50 bonus when you sign up and fund a taxable automated investing account with at least $500. T&Cs apply.
Automate your stock and bond portfolio or trade individual stocks for as little as $1 apiece. Plus, earn 3.50% APY on your cash.
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JPMorgan logo
Finder score
7.2 Great
J.P. Morgan Personal Advisors
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7.2 Great
Mutual funds, ETFs
$0
$25,000
N/A
Financial planning, advice and portfolio management. T&Cs apply.
Get ongoing access to an advisory team with personalized financial planning and expert-built portfolios. Provider terms & conditions apply
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INVESTMENT PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE.
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M1 Finance logo
Finder score
8.2 Great
M1 Finance
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8.2 Great
Stocks, ETFs, Cryptocurrency
$0
$100
4.00%
Build a custom portfolio of stocks and ETFs with automatic rebalancing. Plus, earn 4.00% APY with a high-yield cash account.
Important information
M1 Finance, LLC does not charge commission, trading, or management fees for self-directed brokerage accounts. You may still be charged other fees such as M1’s platform fee, regulatory fees, account closure fees, or ADR fees. For a complete list of fees M1 may charge visit M1 Fee Schedule. M1 is not a bank. M1 Spend is a wholly-owned operating subsidiary of M1 Holdings Inc.. M1 High –Yield Savings Accounts are furnished by B2 Bank, NA, Member FDIC. Obtaining stated APY (annual percentage yield) with the M1 High-Yield Savings Account does not require a minimum account balance. Stated APY is accrued on account balance. APY is solely determined by M1 Spend LLC and its partner banks, and will include account fees that will reduce earnings. Rates are subject to change without notice. M1 High-Yield Savings Account is a separate offering from, and not linked to, the M1 High-Yield Cash Account offered by M1 Finance, LLC. M1 is not a bank.
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Bottom line

Penny stocks are fraught with risk, but some have the potential for growth. If you’re interested in trading penny stocks, make sure your brokerage account provides access.

Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money.

Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.

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Editor

Alison Banney is the banking and investments editor at Finder. She has written about finance for over six years, with her work featured on sites including Yahoo Finance, Money Magazine and Dynamic Business. She has previously worked at Westpac, and has written for several other major banks including BCU, Greater Bank and Gateway Credit Union. Alison has a Bachelor of Communications from Newcastle University, with a double major in Journalism and Public Relations. She has ASIC RG146 compliance certificates for Financial Advice, Securities and Managed Investments and Superannuation. Outside of Finder, you’ll likely find her somewhere near the ocean. See full bio

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Ryan Brinks is a former editor and publisher at Finder, specializing in investments. He holds a journalism degree from University of Wisconsin–River Falls. See full bio

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