Last updated: 26 January 2017
Before we delve into our list of the best online stock brokers, let’s outline what to look for when choosing the right penny stock brokers for your needs.
1/ Availability and Trading Restrictions – arguably the most important factor when choosing an online broker is the availability of penny stocks. Ideally they will give you the ability to trade all penny stocks online, just like you would with any other stock listed on a major exchange, without having to make cumbersome phone calls into their trade center. We outline our favorite penny stock brokers below, but whichever one you choose, make sure they do not impose any limits on the types of penny stocks you can trade.
For example, Interactive Brokers is notorious for restricting users ability to buy stocks online. Other brokerages do not allow individuals to buy and sell stocks under a certain price, usually $1 or less which can be very restricting as even some stocks listed on major exchanges like the NYSE or NASDAQ trade less than this amount.
Trading outside of regular trading hours can also be very helpful. While penny stocks cannot be bought or sold after the market close, some can be bought in the pre-market. The advantage is that you can get in early before the crowd – so try to chose choose a penny stock brokerage firm that allows such trading.
There are some situations in which penny stocks cannot be traded online. For example, some penny stocks are not DTC eligible, which means the stock cannot be deposited with the Depository Trust Company (DTC) for clearing. Basically this means a penny stock cannot be bought or sold online with certain brokers and you will have to call them to execute a trade. Alternatively a stock may have a DTC chill imposed on them. This means there is a special restriction placed on the stock by the DTC, limiting brokerage’s ability to transfer shares through the DTC until the causing issues have been fixed.
2/ Commissions & Fees – probably the next most important factor for most day traders is the cost of executing trades. Because many penny stock trades involve a large number of shares (sometimes in the millions), look for stock brokers that charge a flat rate or commission, rather than on a per-share basis.Ideally you want to look for flat rate fees of $5 per round trip (buy and sell orders) or less, and also look out for promotions where you will get a number of trades free after you open an account.
3/ Trade Execution & Speed – the ability to execute a trade in an fast, efficient manner is imperative. As stocks can rise and fall quickly, sometimes in fractions of a second, you need lightening fast executions so you can get in and out of a trade quickly and as planned. Visit here to learn more about trade executions.
4/ Free Level 2 Quotes & Free Stock Market News – this is also a very important factor as purchasing access to level 2 quotes and live news feeds from a third party can be expensive ($40 per month or more for level 2 alone). Level 2 stock quotes are important when trading as it gives you much more information as to who is buying and selling and what prices. Some brokers give members access to free level 2 which can save you money.
5/ Access to Margin – generally we advise to limit the amount of margin used on any given trade, but having the ability to trade on margin can be helpful in some circumstances. If you want to use margin (particularly useful for those with small accounts), you need a broker that will allow you to open a margin account. Be mindful that pattern day trader rules (PDT rule) applies to margin accounts.
1/ TD Ameritrade
TD Ameritrade’s strength is the simplicity of order executions and availability of penny stocks to buy (although they do not allow penny stocks to be short sold). They also offer free level 2 quotes and streaming CNBC and Dow Jones news feed, which is a pretty big advantage.
TD offers various platforms to trade online, including a web-based platform, a standalone platform, mobile trading platform and its ThinkorSwim professional level trading platform. All of these platforms are relatively easy to learn and use however lack the sophistication of IB’s Trader Workstation platform.
TD is a self clearing firm and is a little more expensive than Interactive Brokers, but still offers a reasonable flat commission structure of $9.99 per round trip trade.
Like the others, TD also offers paper trading for beginner investors.
2/ Interactive Brokers
Let me start by saying Interactive Brokers is not for everyone. First, they require a $10k minimum deposit (unless you are under 18 or are from some foreign countries, such as India for example). Many people starting out may not have access to sufficient capital. Interactive also restricts the ability to trade some penny stocks they deem are “higher risk”. This restriction can be annoying for an active penny stock trader.
On the flip side, IB are widely regarded as having the best online trading platform. The only minor issue is their in-built charting software is not as good as some third party software i have seen. In addition, they accept customers from most countries around the world.
Interactive also have very favorable commissions. They give you the option of per share of flat rate commissions, which are $5 or less per round trip (buy and sell).
E*Trade has been around for more than 25 years and is probably the most well known online stock broker thanks to its popular TV commercials. It also is a very good penny stock broker, with a reasonable $9.99 or less commission on stock trades.
E*Trade allows customers to trade on margin as well as buy and sell penny stocks on a variety of platforms.
They regularly have generous account opening packages, such as free deposits and a number of free trades, saving you money on commission while you start out.