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Pennies on top of financial documentsPenny trading is a tough business. A penny stock is formally defined as any stock whose price is less than $5 per share. This is the legal definition used by the SEC and other regulatory bodies, although in common practice many investors define a penny stock as stock with a share price of under $1. There are a number of challenges that are unique to this type off investing and a financial advisor can spell them out for you.

Penny trading is more tightly regulated than ordinary stock trading, most having to do with the fact that it is a low-volume market. Investors tend not to trade these stocks as often, so prices are both more volatile and less accurate. These stocks can also be more difficult to sell once you have them, and can be far more difficult to buy if you’ve taken a short position. As a result this is a market generally occupied by sophisticated (if not outright accredited) investors.

However, the same volatility that makes this a speculative asset also can make it a highly profitable one. After all, while it takes a lot for Amazon to double in value, a stock selling for $0.25 only needs to climb by a quarter per share to do the same thing. And, ultimately, in the stock market it’s not the price at which you sell the stock that matters; it’s the percentage of the gain.

If you are in the market for penny stocks, and if you fully understand the risks involved, here are five great sites for making these trades.

Best Platform Overall: TradeStation

Pros

TradeStation is a fantastic platform for the kind of data-heavy work that penny stock traders depend on. This service offers an unparalleled amount of technical information that’s specifically useful to volatility-oriented traders like penny stock investors and day traders. This includes access to real-time OTC stock prices, a service that many other platforms don’t offer. Investors should note that these prices can be unreliable, especially when delivered in real time, but it is still a strong feature.

This all comes on top of a service that already offers terrific stock trading tools to begin with. The customization available through TradeStation allows you to build a trading environment that’s just right for you, and its ability to search through industries and exchanges for both mainstream and OTC stocks makes it very useful.

Finally, TradeStation charges solid prices around for OTC trading. With the first 10,000 shares free, followed by just $0.005 per share, this is a good price for a great product. It isn’t the cheapest, but it is certainly competitive.

Cons

TradeStation lags slightly behind its competitors in certain areas. It is not quite as fast as Lightspeed Trading, nor as cheap as Charles Schwab. Yet these are minor issues at best. If you are an OTC stock trader, this is a terrific product for you.

Best Platform For New Investors: E*TRADE

Pros

Man buying some penny stocksE*TRADE is one of the best all-around trading platforms on the web, right up there next to TD Ameritrade. This is particularly true when it comes to new investors. If you’re out there learning the ropes, E*TRADE’s clean design and strong educational resources make it a fantastic choice for you. This is just as true when it comes to penny stocks. If you’re looking to learn this segment of the market, E*TRADE may be the best platform you can select. This platform is easy to use and navigate, allowing new investors to focus on learning the assets rather than the system. It also comes equipped with a terrific range of educational tools, fundamental analysis outlets, and other resources for investors looking to learn how to trade penny stocks wisely.

Cons

E*TRADE is probably not the best platform for sophisticated traders. With prices starting at $6.95 per trade for OTC stocks, this is one of the more expensive choices out there. At the same time its tools are strong, but also not the very best you can find. You will get a better range of data and trading tools from some of the other platforms on this list.

New investors will find E*TRADE a great learning environment. Experienced investors may quickly find it limiting.

Best Platform For Fast Traders: Lightspeed Trading

Pros

Penny stock traders are some of the highest-velocity traders on the market, often second only to the forex investors. This is because both markets share the same tendency to make money off of fractional changes in value. When the movement of a few cents can mean your entire profit margin, it pays to trade quickly (literally).

Lightspeed Trading is a terrific platform for exactly this type of investor. As its name suggests, this product is built with speed in mind. From boasting better connection speeds than its competitors to allowing you to select the routing instructions for any given trade, Lightspeed offers several features specific for very active traders. It has an extremely strong suite of technical indicators, with a particular emphasis on volatility and related data that can help you find and track stocks based on their movement.

Together this platform emphasizes one trading profile: Data-driven investors who trade quickly and trade often.

Cons

This platform delivers very little for any other kind of investor. Lightspeed had little (if any) fundamental analysis, for example, and its interface can be confusing at best. This is a very complicated piece of software that doesn’t try to make life much easier. Unless you’re a sophisticated investor you shouldn’t expect to understand this program.

At the same time, Lightspeed also charges you to trade stocks. Now, even in the era of zero-fee stock trading this is not unusual for penny stocks. Most platforms apply at least a nominal charge due to the difficulty of trading in this segment of the market. However, Lightspeed’s fees are somewhat higher than its competitors. This isn’t a problem if you plan to really take advantage of its features, but make sure you’ll get your money’s worth.

Best Platform For Free Trading: Charles Schwab

Pros

A penny

As noted above, even in the era of zero-commission stock trading many firms still charge you to trade penny stocks. (While brokerages rarely list their prices for “penny stocks,” you can typically find this information under “OTC” or “Over the Counter” fees.) Charles Schwab does not. This platform offers legitimately free penny stock trading, absent any costs charged by other market participants. For an asset that often works on such small margins, this can be an enormous benefit.

At the same time, Schwab also offers a strong trading platform overall. In particular for penny stock traders Schwab offers excellent customization and charting tools. This is very useful in this particular data-driven market, where trades are rarely driven by fundamental analysis.

Cons

While Schwab offers a strong trading platform, it does not necessarily offer one of the best. This is a great all-around platform, but depending on your specific trading strategy the odds are that you can find a specialized tool that will meet your needs better.

If your primary goal is to make sure that fees don’t eat into your margins, Schwab might well be the platform for you. However, if you have other needs as an investor, you may want to look elsewhere.

Best Platform For Risk Takers: Interactive Brokers

Pros

Interactive Broker is a tough one on this list mainly because it is one of the most expensive options you can choose. It charges a $1 minimum per trade, plus per-share prices that start at $0.0035 and climb from there. As these charges grow they can bite into your profits pretty quickly.

So why list it here? There are two reasons. First, Interactive Brokers is a generally outstanding trading platform that also offers penny stock trading. Investors who are looking for a trading solution would do well to consider this product overall.

Second, Interactive Brokers also offers one of the widest range of penny stocks to short when compared with other platforms. This is why we have listed it as the best platform for risk-takers. Shorting penny stocks is one of the highest speculation investments you can take on, up there next to futures and minor market currencies. People make fortunes by leveraging these assets … but they can lose just as much money in the process.

Cons

Interactive Brokers is a great platform for investors who also want to add some penny stocks to their portfolio. However, if you are specifically interested in trading OTC shares, and you aren’t looking to take on the enormous risk of shorting this market, you’ll probably do better with one of the other entries on this list.

The Bottom Line

If you’re looking for a great overall penny trading experience, look no further than TradeStation, while if you still need to learn the ropes you should probably start with E*TRADE. Investors who want to maximize their speed should give Lightspeed a try, while those who want to save every penny on their margins should check out Charles Schwab. Finally, if you’re feeling like taking a big gamble, Interactive Brokers might be the platform for you.

Tips on Investing

  • What role should penny stocks play in your portfolio? The best way to come up with the answer to that for your portfolio is by working with a financial advisor. Finding one doesn’t have to be hard. SmartAsset’s matching tool can connect you with a financial professional in your area to help you figure that out. If you’re ready, get started now.
  • Make sure your investment assets fit your risk profile. SmartAsset’s free, easy-to-use asset allocation calculator will help align your assets with your risk tolerance.

Photo credit: ©iStock.com/Kameleon007, ©iStock.com/pixelfit, ©iStock.com/Konoplytska

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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