Penny stocks are an inexpensive way to get exposure to small, speculative companies that could multiply in value over time. But they’re also among the riskiest investments available. The companies behind them are usually small, unestablished and face steep odds. Most penny stocks fail, and some are outright scams.
What are penny stocks?
Penny stocks are stocks that trade for less than $5 per share. Most penny stocks aren’t listed on a major stock exchange. Instead, they’re usually issued by small, unproven companies and are thinly traded 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 OTC marketplaces. In 2021, the SEC tightened rules around which OTC stocks brokers can quote, requiring companies to have current public information available. This means fewer “dark” penny stocks are actively tradeable than in prior years.
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.
How to buy penny stocks
Choose a stock trading platform. Not all brokerages support OTC penny stocks. Robinhood for example supports exchange-listed penny stocks and a limited selection of OTC-traded ADRs, but does not offer broad access to OTC Pink or OTCQB markets where many speculative penny stocks trade. If you need broader OTC coverage, look for a brokerage that explicitly supports the OTC tier (OTCQX, OTCQB or OTC Pink) where the stocks you’re interested in are listed.
Open your account. You’ll need your ID, Social Security number and details for an initial deposit.
Fund your account. You’ll typically need to fund your account with a bank transfer. Some brokerages process this instantly; others take a few business days.
Find the stocks you want to buy. Search the platform for the penny stocks you want. Use a limit order rather than a market order to control your entry price. Market orders on thinly traded stocks can fill at prices far from what you expected due to wide bid-ask spreads.
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There are stocks listed on the New York Stock Exchange or Nasdaq that trade for less than $5 but are not typically considered penny stocks. A well-known company trading at a temporarily low price is different from a speculative micro-cap. The SEC classifies stocks more by market cap than by 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
True penny stocks on major exchanges tend to be lesser-known pharmaceutical, biotech, mining and energy companies. These listings change frequently as companies get delisted for failing to meet exchange requirements or see their share prices rise above the $5 threshold. Rather than listing specific examples that may be stale by the time you read this, you can screen for exchange-listed penny stocks using your brokerage platform’s stock screener. Filter by share price (under $5) and market cap (under $300 million) to identify current options.
Keep in mind that companies trading on major exchanges at very low prices are often there because the business is struggling, not because the stock is a hidden bargain. Many exchange-listed penny stocks are one compliance notice away from being delisted to the OTC markets.
OTC penny stocks
The majority of penny stocks are found on OTC marketplaces, which have lower listing requirements than major exchanges. The primary OTC marketplace is operated by OTC Markets Group, which organizes stocks into three tiers:
OTCQX. The highest tier, requiring companies to meet financial standards and ongoing disclosure requirements. Some well-known foreign companies trade here.
OTCQB. The middle tier, often called the “venture market.” Companies must be current in their regulatory reporting and meet a minimum bid price of $0.01.
OTC Pink. The lowest tier, with minimal disclosure requirements. This is where most speculative penny stocks trade, and where the risk of fraud and manipulation is highest.
Not all brokerage accounts offer access to OTC marketplaces. Some brokerages allow trades on larger OTC stocks (like foreign companies listed on OTCQX) but not on OTC Pink penny stocks. If OTC penny stocks are your goal, confirm your brokerage supports them before opening an account.
One notable OTC stock is Fannie Mae (FNMA), the government-sponsored enterprise that has traded on the OTC Pink market since being placed into conservatorship in 2008. Despite its name recognition, it carries significant risk tied to ongoing government conservatorship and uncertain future restructuring.
Pros and cons of penny stocks
Pros
Low entry cost. You can hold shares in multiple penny stock companies without spending much, making it easy to spread small amounts across several speculative bets.
Potential growth. A small company that executes well can see significant share price appreciation, though the odds of picking a winner are low.
High volatility for active traders. Penny stocks often see large percentage price swings, which can create short-term trading opportunities for experienced traders with high risk tolerance.
Cons
High risk of total loss. Many penny stock companies go bankrupt, get delisted or never generate meaningful revenue. A significant portion of penny stock investments go to zero.
Illiquid. Penny stocks are often hard to buy and sell because trading volume is thin. You may not be able to exit a position when you want to, or you may have to sell at a steep discount.
Vulnerable to manipulation. Penny stocks are frequent targets of pump-and-dump schemes, where promoters inflate the price through misleading hype then sell at the peak. Social media has made these schemes easier to orchestrate.
Limited information. Many OTC penny stocks are not required to file financial statements with the SEC. Without reliable financial data, it's difficult to evaluate whether a company is legitimate.
No income. Penny stocks rarely pay dividends, as all revenue is usually reinvested back into the company.
Wider spreads. The difference between the bid and ask price on penny stocks is often much larger than on actively traded stocks, meaning you can lose money on the spread alone.
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. 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 may prevent you from making further day trades until your account balance reaches at least $25,000. This rule applies to margin accounts and is enforced across most brokerages.
Social media and penny stock hype
Since 2021, social media platforms like Reddit, X (formerly Twitter), TikTok and Discord have played a growing role in penny stock speculation. The meme stock phenomenon that sent stocks like GameStop and AMC surging demonstrated how coordinated retail buying can move prices dramatically in the short term.
While penny stocks weren’t the focus of the original meme stock frenzy, the same dynamics now regularly play out in micro-cap and OTC stocks. Tips and “DD” (due diligence) posts circulate rapidly on forums, sometimes driving sharp price spikes followed by equally sharp crashes. Be skeptical of stock tips from anonymous social media accounts, especially those promoting obscure OTC stocks with urgent language.
Penny stocks vs. blue-chip stocks
The opposite of penny stocks are blue-chip stocks. Blue chips are large, established companies with long track records of stable financial performance. Some of the best-known companies are considered blue chips, such as Microsoft, Hershey’s and McDonald’s.
Penny stocks
Blue-chip stocks
Price
Under $5 per share
Varies widely, often $50 to $500+
Market cap
Typically under $300 million
Usually $10 billion+
Dividends
Rarely paid
Almost always paid
Volatility
Extreme. Daily swings of 10-50%+ are common.
Moderate. Major moves are typically 1-3% per day.
Liquidity
Often thin. Hard to buy and sell at desired prices.
Very liquid. Easy to enter and exit positions.
Financial reporting
Often limited or absent, especially on OTC Pink.
Extensive, audited quarterly and annual reports.
Risk level
Very high. Total loss is common.
Lower. Can still decline but backed by real earnings.
Should you invest in penny stocks?
You could consider investing in penny stocks if you:
Have a high risk tolerance and can afford to lose your entire investment.
Are an experienced investor who understands how to read financial statements (or recognizes when they’re absent).
Are willing to set stop-loss orders or predetermined exit prices and stick to them.
Treat penny stocks as a small, speculative portion of a diversified portfolio rather than a core holding.
For most investors, particularly beginners, index funds, ETFs and established stocks are a safer foundation. If you’re drawn to penny stocks, consider limiting them to 5-10% of your total portfolio at most.
Tips for investors considering buying penny stocks
If you think you can handle the risks, here are some tips to help you get started:
Do your research
This is important for all investments, but critical for penny stocks. Check whether the company files financial statements with the SEC (you can search for filings at SEC EDGAR). If a company has no public filings, that’s a significant red flag. Look at revenue, cash on hand, burn rate and whether the company has a viable product or business model.
Plan a strategy and stick to it
Before you start buying, decide how much you’re willing to spend and set a price at which you’d sell, both up and down. Many experienced penny stock traders use limit orders and stop-loss orders to manage risk. Decide your exit points before you enter a position, not after.
Keep your portfolio balanced
Penny stocks should occupy only the high-risk portion of your total investment picture, and for most people, that’s a small segment. Don’t put money into penny stocks that you can’t afford to lose entirely.
Don’t let emotions guide your decisions
It can be easy to get attached to a penny stock, especially after reading bullish posts on social media. But when the stock price continually falls, don’t make excuses for why you should keep holding. Stick to your strategy and leave your emotions out of your decisions.
Don’t get sucked in by “cheap” prices
Penny stocks may appear cheap compared to stocks on major exchanges, but price alone doesn’t indicate value. A stock trading at $0.50 isn’t necessarily a bargain. The price reflects the market’s assessment of the company’s prospects, and low prices often exist because the business has serious problems. Consider why the stock is priced so low before buying.
Be wary of promotions
If you receive unsolicited emails, text messages or social media posts promoting a specific penny stock, treat them with extreme skepticism. Many penny stock promotions are paid advertisements or pump-and-dump schemes. The SEC requires promoters to disclose compensation for stock promotion, but enforcement is imperfect and scams are common.
Bottom line
Penny stocks are among the highest-risk investments available to retail investors. While the low share price makes them accessible, the vast majority of penny stocks lose value over time and many go to zero. If you choose to trade them, do so with money you can afford to lose, a clear exit strategy and healthy skepticism toward stock tips from social media.
Before you invest, compare brokerage accounts to find one that supports OTC trading and fits your needs.
Frequently asked questions
Can you actually make money with penny stocks?
Some traders do profit from penny stocks, but the odds are against you. Studies have consistently shown that most penny stocks decline over time, and the SEC warns that many investors lose their entire investment. The stocks that do see significant gains are the exception, not the rule.
What’s the difference between OTC Pink, OTCQB and OTCQX?
These are the three tiers of the OTC Markets Group, organized by the level of disclosure and financial standards required. OTCQX is the highest tier with the most stringent requirements. OTCQB is the middle tier, often called the venture market. OTC Pink is the lowest tier with minimal requirements, and where most speculative penny stocks trade. The less disclosure a company provides, the higher the risk of fraud or misinformation.
Why doesn’t Robinhood offer OTC penny stocks?
Robinhood only supports stocks listed on major exchanges like the NYSE and Nasdaq. It does not offer access to OTC Markets Group tiers (OTCQX, OTCQB or OTC Pink). If you want to trade OTC penny stocks, you’ll need a brokerage that supports OTC access, such as Interactive Brokers, Charles Schwab or Fidelity.
What is a pump-and-dump scheme?
A pump-and-dump scheme is a type of securities fraud where promoters artificially inflate a stock’s price through misleading positive statements, then sell their own shares at the inflated price. Once the promoters sell, the stock price typically crashes, leaving other investors with losses. These schemes are especially common with thinly traded OTC penny stocks.
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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.
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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.
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