How to Invest in Penny Stocks

Daniel Penzing
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It's important to understand how penny stocks work before you start investing in them.

Penny stocks are the jump-off point for many professional traders and investment advisors. They're the gateway to everything from stock market investment to becoming a market maker and even hedge fund management.

Most penny stock trading, however, is done by the small investor. Buying and holding penny stocks, or trading penny stocks for that matter, requires a good understanding of how penny stocks work.

In this Guide:

1-What are Penny Stocks?

2-What is the Cost of Penny Stocks?

3-How can I Buy Penny Stocks?

4-What is Penny Stocks Scams?

5-When to Invest Penny Stocks?

6-How to check Penny Stocks Scams?

7-What is a Penny Stock Dinosaur?

8-What are used Penny Stock?

What Are Penny Stocks?

Websites like Facebook or Groupon connected people in ways never before possible. You could find someone around the world to play Frisbee golf with, or you could buy contacts in bulk at a discount! As you can see, this created new opportunities previously unseen.

But as the world realized how amazing the internet could be, the same people working to connect us found something quite unexpected. Every time they created a new platform to connect users, they found people doing really terrible things.

Criminals found ways to steal from each other, and spammers found a way to mark their territory. A lot of people found new ways to defraud people, but criminals weren’t the only ones trying to test the limits of the internet.

Early internet pioneers found people hoarding piles of virtual money in online video games. The users, called gold farmers, would play for hours, hoping to find valuable treasure. The treasure was often sold for piles of real money, given to someone else who used it to buy a virtual sword they would hang on the wall of their virtual home.

Some gold farmers found a way to turn this gold rush into an actual way to make real money. They found ways to sneak past the defenses built into the game and would harvest gold and either sell it for real money or trade it in for a virtual sword. Either way, they would make money for doing something they enjoyed anyway.

Where to Invest in Penny Stocks

So, if you want to trade in penny stocks, which online broker should you trade with to get the best value for your money?

There are several factors you should consider when picking a broker to start investing in penny stocks. Here are some of the things you should look into:


When it comes to trading, costs matter a lot. You want to trade with a broker that has a fair and reasonable commission structure. Avoid brokers who charge exorbitant trading fees.

Trading Platform

A good trading platform is a must. You want to trade with a broker who offers reliable, solid and secure trading software. A great trading platform should be user-friendly and have the right functionality to suit your investment requirements. The trading platform should also be customizable.

Research Tools

You want to trade with a broker that is equipped with well-designed research tools to help you make smart, informed investment decisions.

Other Factors

Consider whether the broker you are trading with has a good reputation as well as good customer support. You need to be able to reach them easily and get your queries solved swiftly. You don’t want to have to wait for hours only to get a canned response from your broker. You should also consider the available trading instruments and the trading environment.

Best Brokerage Firms to Trade Penny Stocks

Why Are They So Cheap?

Penny Stocks are basically stocks with a price of a few cents or less. The value of a share often drops to a new low every day. While this price movement can be disheartening to many investors, it makes penny stocks extremely attractive to traders.

Penny stocks are particularly appealing because they offer a high return on investment, while the level of risk is less than that associated with traditional stocks. In addition, there are no transaction costs involved with penny stocks.

Investments like these have a wide margin for profit. They are risky and you can lose your money very quickly. This is why it is important to tread carefully and use only a small amount of your investment funds.

You will also need to get information about companies that are listed on penny-stock exchanges. Larger exchanges only list a few penny stocks each year, so they are easy to monitor; you can take a look at balance sheets, profitability and read financial reports. If an exchange saw the potential of a company and listed it, then it should have an advantage.

Before you buy penny stocks, you should know more about some of them.

Why Invest in Penny Stocks

Penny stocks have a bad reputation for dangerous investments. We are going to take a look at why this reputation exists and whether or not it could be suspect.

As a caveat, whether or not penny stocks are a good investment for you depends on your situation. Make sure you have the basic foundation in place, such as a proper emergency fund and a solid financial plan, before investing.

Penny Stocks to Be Proven as a Good Investment Choice

There are several reasons why penny stocks have a bad reputation, but ultimately, it boils down to the same thing: low value and high risk. While the stock market’s overall trends sometimes make it seem like stocks are a good investment, it’s important to take a step back and consider the kind of investment that penny stocks really represent.

Essentially, investing is a form of gambling, and more specifically, it’s a form of gambling with highly volatile odds. You work hard to save money for your future and feel the need to invest it somewhere. Over time, you may begin to think of investing as an investment strategy, but ultimately, it’s still a gamble.

Penny stocks involve even more risk than other stocks and are not a good investment choice. For one thing, penny stocks trade on the pink sheets market, which is perceived to be more shady than other markets.

Reason #1: The single biggest attraction for penny stocks is the potential for super big returns.

It’s the same reason you buy lottery tickets, hoping to win the huge jackpot. It’s the same reason you buy stocks that you have no knowledge about other than the fact that they had a run up and the stock price is really low and now the company is doing poorly. You’re hoping that the company improves and your stock price becomes worth much much more. That’s all a penny stock is. It’s hoping that the company has a positive future. Many penny stocks do not have a positive future. They go bankrupt, they never have any products, they never have any sales, how the heck are they ever going to be worth more? There are many reasons why penny stocks are risky that’s why I tell you never to use real money to risk on penny stocks. You should use play money only. The reason I am saying this is because there have been many companies who have been presented as penny stocks in the media when they are not even penny stocks. So you are investing in a stock that is over valued, or you’re investing in a stock that doesn’t even exist. Always research before you have your money in some company. And when you learn what research is, you find out that it is easy to do. Many people don’t do it. And they are the people who lose money.

Reason #2: The speed of those returns is another attraction.

Penny stocks can be gone and forgotten in an hour, so there is never the risk of a long-term holding that takes years to correct.

In addition, the short-term volatility that underlies penny stocks can be especially attractive for investors with a propensity for risk seeking. We know that risk seeking is linked to midbrain neural function, so it’s no surprise that penny stocks are especially attractive to a certain segment of the population.

Reason #3: But perhaps the most significant incentive is to get rich quickly.

There is a serious impression that successful penny stock trading can make you the newest, richest member of the neighborhood. There’s no doubt that trading penny stocks can be lucrative, but so can trading typical stocks and bonds, as long as you do it wisely.

With that said, we know that a lot of you are seeking a get-rich-quick scheme. While penny stock investing can be rewarding for beginners in the long run, it doesn’t have to be easy money. Institutional money managers have been losing money on their penny stock trades for years, so it’s not impossible that you also lose money on yours. But as long as you do it properly, you can also make a profit.

Here are the three major reasons why investors are drawn to penny stocks:

The Risks of Investing in Penny Stocks

Almost anyone can invest in penny stocks, which is an attractive prospect to some. You don’t need a large investment to be able to get stocks on the cheap, and most penny stocks are small market companies that have growing potential. However, there is a lot of risk associated with penny stocks and it’s important to be aware of that.

One of the biggest risks involved with penny stocks is the lack of regulation. Most penny stocks are traded over the counter or on pink sheets, which means that even the people trading them don’t need to be regulated. You’re generally not eligible for financial compensation when something goes wrong with these stocks, and they are far more susceptible to fraudulent activity.

Penny stocks are also highly volatile. In some cases, penny stocks you invest in can go absolutely nowhere for months, and you can lose money on them. Drawing attention to themselves with penny stock promotion is also a big part of what keeps these stocks alive. Scams that offer quick returns on your investment can be very tempting and are one of the first things to look for when investing in penny stocks.

How to Minimize the Risks of Penny Stock Investing

Penny stocks have always been considered a risky investment. The risks are high and the rewards are low, so only caution and research will help you succeed in your penny stock investments.

Minimize the risks of losing money:

Protect yourself with stop losses or limit price orders.

Invest only the money you can safely afford to lose.

Constantly monitor the price of the penny stock and the price changes of the stock and the market.

Minimize the risk of poor information:

Do research on the company, its directors, and its market.

Ensure that the information you get is from legitimate sources.

Resist making investment decisions based on rumors or information about the stock that is not verified.

Here's What We Recommend

If you're new to the world of penny stock investing, you may want to read up on how to set up a trading account .

Once you have an account set up, the next step is to choose which broker you want to use. There are a lot of different brokers out there, and some are better for penny stock trading than others.

We personally use TD Ameritrade for all of our penny stock trades. They have competitive prices, a lot of educational material on how to trade, and a solid, stable platform.

I’ve used other brokers in the past, and without fail, they’ve all gone out of business or just closed my account. With TD Ameritrade, not only have I never lost money, but I've never had any issue trading penny stocks.

So let’s move onto your first step to learning how to invest in penny stocks.

Should You Invest in Penny Stocks?

If you don’t know, a penny stock is any stock trading in lower-priced securities … usually under five dollars. There are some other “official” guidelines, but this is the general definition.

Penny stocks, by their nature, tend to have a lot of volatility. Some of them are downright scams and those you should totally avoid. Other penny stocks are legitimate businesses working on the next big thing for stock market investors.

Within the realm of investing, the “P” word can seem like a dirty word. It connotes some kind of low quality level or risk factor. But let’s be clear: not all penny stocks are bad and not all high priced stocks are good. That’s because quality and risk are measured in several other currencies besides stock prices.

The best thing about penny stocks though is the range of opportunity that you have when you invest. To a certain extent, you can make or lose it big – just like investing in a large cap stock. But that’s not even why they are so popular.