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 complete the transaction. Luckily nowadays setting up an account is easier and more affordable than it was a decade ago. With advancements in technology, everything has moved online with no need to pick up 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 broker that you are unaware of that will impact your performance in the long run. You don’t want to end up using a brokerage such as Robinhood for penny stocks. You’ll be at significant disadvantageous to others. Below I outline the most important elements to consider in your selection and I evaluate the top six brokers that are the best available options.
Why You Should Paper Trade
Access to the stock market is too easy nowadays; the scary thing is anyone can set up 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 Jordan Belfort. Every 18 year old wants to live the lifestyle portrayed in the film. Trading has nothing to do with wild parties and snorting cocaine off hookers. For new traders, I recommend paper trading for the first three months to gain a good understanding of the how the stock market works. 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. Also, it will help speed up your learning curve without risking your savings.
I initially got hooked on the stock market through a paper trading competition my school held on MarketWatch. Out of 500 other students, I ended up finishing second. 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. Human emotions are difficult to control and penny stocks don’t generate strong volume. You might only receive partial fills on some of your orders.
3 Main Things to Watch out for
- Surcharges – Depending on the broker, most will add a surcharge to shares under a dollar. TradeKing charges an extra one cent per share below $2, so if you buy 10,000 shares, it’ll cost you an additional $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 excellent discounts on large orders. E.g. TD Ameritrade, Etrade and Charles Schwab all provide flat fees or substantial 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 want the ability to trade an unlimited amount of shares without surcharges.
- Etrade is my overall top choice as they have a flat fee rate combined with an excellent trading software.
- $6.95 flat rate, drops to $4.95 if you execute more than 30 transactions in a quarter.
- $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 executions are lighting fast.
- Better suited for active traders because of their tiered pricing structure. Non-active investors will be forced to pay extra commissions.
- Customer service is above average in comparison to others and 24/7 email and phone support are available.
- Current promotion – trade free for the first 60-days for accounts higher than $10,000.
- Video lessons available to teach the basics of the stock market
- The major downfall is not accepting people from certain countries.
- Tim Sykes preferred broker at the moment.
- Interactive Brokers is one the leading firms that cater to international investors.
- Fixed commission rate, a fee of $0.005 per share depending on volume, $1 minimum.
- $10,000 account minimum is steep for retail traders.
- Charge fee’s to modify or cancel an order and monthly inactivity fee ranges from $3 to $20.
- Commissions are expensive unless you’re an active day trader.
- Have poor customer support but are the best option for shorting shares under $2.
- Have some of the best borrows for penny shares, although shares to short go fast.
- The trading platform can be challenging to learn at first and is not ideal for novice investors.
- Unlike Etrade, they accept oversea’s international traders. They don’t discriminate against particular countries which is a huge positive!
- Charles Schwab is one the most iconic and well-known brokers on Wall Street.
- Transparent fee structure makes them one of the best options to trade low-cost stocks. They recently dropped their commission rate from $8.95 to $4.95.
- Account minimum is a reasonable $1,000 and unlike some firms, they don’t charge any inactivity fees.
- Etrade’s trading platform is superior, but Charles Schwab does offer cheaper trades and is better suited for beginners.
- Unfortunately, Charles Schwab doesn’t provide paper trading accounts.
- Latest promotion – $100 bonus for time-customers.
- TD Ameritrade has been in business for over 40 years.
- Took over Thinkorswim back in 2009, which was my previous preferred option.
- They have a robust 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, frustrating customers who were looking to exit trades.
- TD Ameritrade offers good customer service, 24/7 support. Some of my emails got replied to within 30 minutes.
- No minimum account 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 want to short sell 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 more expensive in comparison to the industry standard. TD Ameritrade claim charging more than competitors allows them to offer better customer support or maybe they’re greedy like everyone else on Wall Street.
- Suretrader is an offshore broker in the Bahamas. Suretraders only competitive advantage is customers can bypass the PDT rule because of their location. The PDT rule is a 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 annoying, making it really difficult to grow your account but at the same time safeguards day traders from losing money.
- In 2017 they changed their commission structure, making them one of the most expensive options and disabled direct access routing.
- Charge $4.95/trade for up to 10,000 shares with an ECN fee ranging from (0015-.0045) to .01 per share.
- Currently, offer 6-1 leverage and in the future plan to offer 20-1 leverage. (I highly recommend not using any leverage)
- Customer service is relatively poor because they have a small customer support team to service all their clients. According to Linkedin they only have around eight employees.
- In recent times their CEO, Guy Gentille was indicated by the SEC for small cap manipulation. 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 $4,000 with them.
- Good borrows for hard to short stocks and have a list of 10,000 symbols to short sell.
- An alternative option for desperate traders in the UK / outside the US with very little capital. They should be the last choice for those unable to open accounts with more reputable companies such as Etrade.
- No longer recommended by Timothy Sykes.
- There is 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.
- The free web platform is basic and you need to pay $15 per month for their more advanced platform.
- Rarely offer promotion codes to new clients.
Other Things to Consider
Each brokerage 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 Interactive Brokers allows 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 received 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 that will later become pump and dumps.
- 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. Charging extra fees for trading tools is the normal practice.
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, traveling abroad in exotic locations. People want to start making money straight away. Instead be patient, take things slow and paper trade for at least three months. Remember you have to learn before you earn! Once you’re ready I recommend starting with at least $2,000. Etrade, Charles Schwab and Interactive Brokers are the top three discount penny stock brokers. At the end of the day, your ultimatum decision will depend on your own individual circumstances.