Every week I get dozens of emails from people looking for a good penny stock broker that will allow them to day trade online. You simply can’t buy or sell shares in any public company on the Nasdaq or NYSE without a broker to help you complete the transaction. Luckily nowadays setting up a brokerage account is easier and more affordable than it was a decade ago. With advancements in technology everything has moved online with no need to pickup the phone to execute trades. Despite it being less expensive, finding a suitable trading platform specifically for penny stocks is still a frustrating and challenging task that will leave you pulling your hair out. There are so many factors involved in selecting a firm that you are unaware of that will affect your performance in the long run. Below I outline the most important elements to consider in your selection and I evaluate the top 5 brokers that provide the best overall value.
Why You Should Paper Trade
Access to the stock market is too easy nowadays, the scary thing is anyone can setup an account and deposit money despite having little or no experience. The problem is beginner traders are too keen to start investing, movies such as the Wolf of Wall Street serve as a motivating factor to become the next Jordon Belfort and live the lifestyle portrayed in the movie. Trading has nothing to do with wild parties and snorting cocaine off hookers. For new traders I recommend paper trading for the first 3 months to gain a good understanding of the how the stock market works and experiment with new trading strategies to discover what trading style suits you best. Although you’re using virtual money, paper trading will help you feel more comfortable executing trades and speed up your learning curve without risking your own savings. I initially got hooked on the stock market through a competition my school held on MarketWatch, out of 500 other students I ended up finishing second but unfortunately there was no prize for second place! While I didn’t win the competition, I did develop a solid understanding of financial markets in a controlled environment that was fun. It’s important to note, once you make the jump to live trading you’ll realize it’s not the same as simulated trading because human emotions are involved and penny stocks don’t generate enough volume, so you might only receive partial fills on some of you orders.
3 Main Things to Watch out for
- Surcharges – Depending on the broker, most will add surcharge to shares under a dollar. TradeKing charge an extra one cent per share below $2, so if you buy 10,000 shares it’ll cost you an extra $100. If you’re not careful these small charges can add up and will cut into your potential profits. Your brokerage should charge a flat commission rate or offer good discounts on large orders. E.g. TD Ameritrade, eTrade and Charles Schwab all offer flat fee’s or large discounts with no sneaky hidden fee’s that catch you off guard.
- Trading Restrictions – You should be able to trades shares using an online platform and be cautious of any firms forcing you to place trades over the phone. Some companies impose restrictions especially when it comes to issues such as short selling penny stocks.
- Volume Restrictions – Ideally you will be allowed to trade an unlimited amount of shares without surcharges.
Other Things to Consider
Each broker will have different account minimums, commissions and trading restrictions.
- Account Size – The biggest obstacle is not having enough capital and people don’t realize there’s a pattern day trader rule that will restrict your activity to 4 trades in 5 business days. I suggest starting off with $2000 to make it worthwhile as commissions will impact your profits. It’s crazy to think that TD Ameritrade & Robinhood have no minimum deposits to entice new customers.
- Where you live – People who live outside the United States will no doubt have a harder time finding a broker that is penny stock friendly because some companies don’t accept people from certain countries. Luckily big firms accept customers from countries like the UK and Australia but will need at a minimum of $10,000.
- Quality of customer service – The bigger your account size the better customer service you will receive. Brokers treat their big clients a lot better for obvious reasons and hate dealing with poor people. That’s why they discourage people from penny shares because they have recieved a bad reputation over the years and with good reason. 90% of these companies represent terrible investments and are just not something you would put in your 401k. Many of them are just shell companies put together for the sole purpose of a ‘pump and dump’.
- Trading Tools – For active traders, trading tools play a big part in their success. All the top brokers should provide live streaming quotes, free demo accounts, level 2 quotes, scanners, mobile apps and stock charting tools to perform technical analysis. Extra fee’s are normally charged for these tools.
- Etrade is my overall top choice as they have a flat fee rate combined with excellent trading software.
- Current promotion – trade free for the first 60-days for accounts greater than $10,000
- $500 minimum for a cash account and $2,000 for a margin account.
- No surcharges on penny shares and discounts given on large orders.
- Great investment tools for research and the executions are lighting fast.
- Better suited for frequent traders because of their tiered pricing structure, so it’s not ideal for non-active investors will pay extra commissions.
- Customer service is above average in comparison to others and 24/7 email and phone support is available.
- Video lessons available to teach the basics of the stock market
- Major downfall is not accepting people from certain countries.
- Tim Sykes favourite broker at the moment.
- While Interactive Brokers have poor customer support they are the best option for shorting shares under $2.
- Have some of the best borrows for stocks, although shares to short go fast.
- Trading platform is difficult to learn and not recommended for novice investors.
- $10,000 account minimum is not suitable for most retail traders.
- Pricing structure is flat, fee of $0.005 per share depending on volume.
- Charge fee’s to modify or cancel an order and charge a $20 monthly inactivity fee.
- Commissions are expensive unless you’re an active day trader. Their customers are mainly made up of high net worth individuals and massive institutions.
- Unlike Etrade they accept oversea’s international traders and don’t discriminate against certain countries.
- Have been in business for over 40 years.
- Took over Thinkorswim back in 2009, which was my previous preferred option.
- They have a solid trading platform and useful charting tools with tutorial videos to help get you started. Despite this in the past their platform has suffered from minor technical errors, pissing off customers who were looking to exit trades.
- TD Ameritrade offer good customer service, 24/7 support. Some of my emails have been replied to within 30 minutes.
- No account minimum deposit (normally at least $1,000 is required) and no surcharges on shares below $5
- No monthly or inactivity fees, so they’re perfect for long term investors.
- Great executions and has decent borrows if you’re interested in shorting penny stocks.
- Free paper trading demo, helpful for beginners who wants to test strategies and get a feel for the market.
- The main complaint about TD Ameritrade’s is their fee’s. $9.99 is a lot more expensive in comparison to other companies. It can be argued charging more than competitors allows them to offer better customer support or maybe they’re greedy like everyone else on Wall Street.
- Best thing about Suretrader is the opportunity to bypass the pattern day trader rule, as it’s located offshore in the Bahamas. The PDT rule is an SEC rule that does not allow people with accounts under $25,000 from executing more than 4 or 5 day trades in any 5-day business period. This is really annoying, making it really difficult to grow your account quickly but at the same time safeguards day traders from losing money.
- Customer service is relatively poor because they have so few customer rep’s to service all their customers. Most of which are inexperienced traders who don’t a clue how to even place orders.
- Suretrader is a tiny company, according to Linkedin they only have around 6 employees.
- In recent times their CEO, Guy Gentille was indicated by the SEC for penny stock manipulation. It must be noted that Suretrader had no involvement in the schemes but it has affected their reputation. Hearing news like this would make me feel uneasy. So for that sole reason I wouldn’t have more than $2,000 with them.
- $500 account minimum but do charge an ECN fee of .003 per share for routing.
- Charges $4.95/trade for up to 1,000 shares but do charge an ECN fee of .003 per share for routing. Up until the end of the year they offer $3 per trades, use the promo code Celebrate2016 to avail of this discount.
- Currently offer 6-1 leverage and in the future plan to offer 20-1 leverage. (I highly recommend not using any leverage)
- Good borrows for hard to short stocks and have a massive list of 10,000 symbols to short sell.
- Good option for penny stock traders in the UK / outside US with very little capital who can’t afford or won’t aren’t able to open accounts with more reputable company like Etrade.
- No longer recommend by Timothy Sykes.
- There is very limited information about the company available on Google even though they started in 2000, they don’t even have a Wikipedia page.
- Better suited for OTC stocks, it only costs $7 per OTC trade.
- Have a volume surcharge of one percent for trades over 500,000 shares.
- No account minimum.
- Charge inactivity fee’s, $30 per quarter.
- Free web platform is too basic and need to pay a $15 per month for their advanced platform.
- Rarely offer promotion codes to new clients.
Too many people especially teenagers are too eager to start day trading. They see photo’s on Instagram of Timothy Sykes advertising his lavish lifestyle, travelling abroad in exotic locations. People want to start making money straight away. Be patient, instead take things slow and paper trade for at least 3 months. Remember you have to learn before you earn! Once ready I recommend starting with at least $2,000. Etrade and Interactive Brokers are the top two online penny stock brokers with the best reputation.