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How to invest in penny stocks on robinhood
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What are Penny Stocks?
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Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.Definition:
A penny stock is stock in a small company with shares that trade for less than $5, offering potentially high rewards but also significant risks.
🤔 Understanding penny stock
A penny stock is any small company’s stock that trades at less than $5 per share. Larger, established companies can have shares trade below $5 without qualifying as a penny stock, but most avoid low share prices anyway. Penny stocks are generally small, low-value companies for a reason. They have a high risk of failure, which can cause investors to lose all of the money they invested. Penny stocks typically don’t trade on the major stock exchanges, instead trading over-the-counter (OTC). That means that it can be harder to buy or sell a penny stock than shares in a larger firm.
Example
While there are some exceptions, the vast majority of penny stocks don't pan out for investors. These stocks are often volatile and risky, with buyers frequently losing all or part of their investment.
Takeaway
Investing in a penny stock is like pulling your goalie during a hockey game…
When you pull your goalie off the ice in a hockey game, you get to have one extra person try to score a goal. However, you don’t have anyone defending the net, so it’s easy for the other team to score. You take a big risk for a chance at a big reward. Penny stocks are similar. They’re small, untested companies, so investing is a big risk.
Ready to start investing?
Sign up for Robinhood and get your first stock on us.Sign up for Robinhood
Certain limitations applyThe free stock offer is available to new users only, subject to the terms and conditions at www.oldyorkcellars.com Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.
Tell me more…
What are penny stocks?
Penny stocks are shares issued by small companies, typically with a price below $5 per share. They get their name from the fact that you can often buy penny stocks for less than a dollar (meaning you can pay in pennies). This was especially true decades ago, before inflation drove the prices of shares in these kinds of businesses above $1.
The majority of penny stocks don’t trade on major stock exchanges, though there are a small number that do. Instead, penny stocks typically change hands in over-the-counter transactions. That means traders who buy and sell penny stocks work directly with stockbrokers and dealers to complete transactions rather than using an exchange such as the New York Stock Exchange or NASDAQ.
Many penny stocks experience low levels of liquidity, meaning that people buy and sell shares infrequently. While millions or tens of millions of shares in a major company could change hands in a single trading day, a penny stock may see fewer than a thousand shares, or even no shares, change hands.
The lack of liquidity in penny stocks leads to a few things that investors need to keep in mind. One is that illiquid securities are difficult to price. When many people want to buy or sell shares in a company, the price will generally find an equilibrium between the level of supply and demand. But when few people transact, as is often the case with a penny stock, it’s much harder to discover the fair price for the security.
Low liquidity also means that investors might not have the opportunity to sell their penny stocks after buying them. If nobody wants to purchase the shares, they might be stuck in the investor’s account.
The risk of investing in penny stocks is high. It’s difficult to determine their fair value, investors can struggle to sell them due to low trading volumes, and many penny stocks provide far less information to the public than major companies do.
What is the minimum needed to buy penny stocks?
Still, one appeal of investing in penny stocks is that a person doesn't need much to get started. Penny stock shares are cheap, so they can be purchased as long as the account has sufficient funds.
Like other investments, the more money a person has, the more they can purchase. If a person has $5 and wants to buy shares in a penny stock trading at $1, then they can buy five shares. If the person has $, they could buy shares. The more shares a person owns, the more the value of their holdings may rise or fall.
If your brokerage charges a commission for penny stock transactions, consider how much the commissions will cost compared to the value of your investment. For example, if you put $5 into a penny stock and pay $ in commission for each purchase or sale, you would need your investment to appreciate by 50% just to break even.
Can you make money from penny stocks?
It’s very difficult to make money from penny stocks, and the majority of people who try to fail. You’re far more likely to lose money than you are to succeed at trading penny stocks.
Some investors have turned a profit through penny stock trading, but they are by far the exception rather than the rule. Investing in penny stocks is incredibly risky and many investors have lost large sums of money by investing in penny stocks.
One major risk of investing in penny stocks is that the SEC applies less stringent reporting rules to them than it does to larger firms. Companies with fewer than 2, investors and less than $10M in assets don’t have to submit financial reports in the same way most public companies do. That makes it difficult for investors to know the health of the business.
Another risk of penny stocks is that it’s difficult to know a fair price for each share. When a company’s shares trade frequently, the price quickly reaches equilibrium based on the level of supply and demand. Penny stock shares can trade just a few times an hour, day, or even a week. When few people want to trade, it can be hard to determine a fair price. The lack of reporting requirements also makes fundamental analysis of the underlying business difficult.
Many penny stocks come from brand new companies. That means that the firms have almost no track record for investors to base their decisions on. Investing in an untested company is risky because it’s difficult to predict whether the company will perform well or not. Businesses with longer histories tend to have more experienced management and staff, which can contribute some amount of stability.
Another risk is that it's easier for malicious actors to manipulate the prices of penny stocks. One investor buying many shares in a penny stock may cause its price to increase significantly. One investor selling many shares may cause a penny stock's price to crater. While the SEC remains on the lookout for so-called pump-and-dump schemes and other illegal manipulation, penny stocks are far more susceptible than larger companies.
How to start investing in penny stocks?
The reality is that investing in penny stocks is generally considered a bad idea. It’s difficult to find reliable information about them, and they are far more dangerous than other types of securities.
One reason that it’s so hard to find information about penny stocks is that while the companies do need to submit certain reports to the Securities Exchange Commission, they don’t have to submit the same reports as larger firms.
Many brokerages make it intentionally difficult to start investing by adding additional requirements before a person can begin placing penny stock trades, such as calling and placing trades over the phone rather than through a web portal.
All investing carries risk; always keep investment objectives in mind.
Where can I trade penny stocks?
People can buy penny stocks using almost any brokerage account.
Some brokerages may apply additional restrictions or requirements before they let their customers trade penny stocks. They intend for these requirements to protect inexperienced investors from the higher levels of risk involved with penny shares.
For example, you may need to call and speak to a representative over the phone to authorize an investment in penny stocks, rather than placing an order from your account’s web portal.
Penny stocks are extremely risky, and historically only a very small percentage have ever succeeded. Loss of large percent of your investment is likely.
Ready to start investing?
Sign up for Robinhood and get your first stock on us.Sign up for Robinhood
Certain limitations applyThe free stock offer is available to new users only, subject to the terms and conditions at www.oldyorkcellars.com Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.
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How to buy penny stocks on Robinhood
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Robinhood is one of the few brokerage accounts that offers access to penny stocks — stocks that can be purchased for $5 or less. Here’s how to find and purchase exchange-listed penny stocks on this popular trading platform.
You can buy penny stocks on Robinhood, but the selection is limited. This is because most penny stocks are not listed on the major exchanges like Nasdaq or the New York Stock Exchange and are, instead, listed on the Over-the-Counter Markets. Robinhood users can only trade exchange-listed stocks, making the app’s selection limited to penny stocks listed on the major exchanges.
Additionally, it’s difficult to search for penny stocks. Users can search for broad categories, like ETFs or stocks across certain sectors, but penny stocks are not a searchable category on the app.
Exchange-listed penny stocks are typically viewed as the safer alternative to OTC stocks because to be listed on an exchange, stocks must meet that exchange’s listing requirements and pay entry and annual listing fees. Requirements vary by exchange but typically include minimum stockholder equity amounts, minimum share prices and minimum shareholder counts.
Robinhood doesn’t offer access to over-the-counter (OTC) penny stocks.
To browse penny stocks, log in to Robinhood on a computer using the web browser. You can’t browse penny stocks in the app or on www.oldyorkcellars.com you’re logged in on your desktop:
- Under Popular collections, select Show more.
- Select the sector or category you’d like to explore and click to see all stocks.
- On the right side of your screen, drag the price cap button to set the maximum stock price at $5.
Taking these steps limits the available stocks you see to Robinhood’s penny stock offerings. From here, you can sort the available stocks using Robinhood’s stock filters along the top of the screen. Organize by price, movement, market cap, popularity and analyst ratings.
Watch our short video that takes you step-by-step through the process:
Ready to submit an order? Here’s how:
- Fund your account. Link your Robinhood account to an external bank account and transfer up to $50, a business day, and access to up to $1, instantly. Robinhood suggests transferring funds before making a purchase.
- Pick a stock. Use Robinhood’s search tools to navigate available penny stocks.
- Select your order type. Indicate whether you’d like to execute a market, limit, stop loss or stop-limit order on your purchase.
- Indicate the number of shares. Enter the number of shares you want to purchase.
- Review your order. Take a look at the details of your order and make sure all the information is correct.
- Submit. Confirm your purchase by swiping up on mobile or clicking Buy on the desktop platform.
Robinhood doesn’t offer access to over-the-counter shares, which helps mitigate some of the risks associated with penny stocks. Still, you should carefully consider the following before investing in penny stocks:
- Limited track record. These low-dollar stocks tend to come from companies with a limited financial history, which may make it difficult for you to vet the stock.
- Illiquid. Penny stocks tend to trade at a lower volume than well-known companies or blue-chip stocks, which can make them more difficult to buy and sell.
- Unpredictable. Penny stocks have a reputation for volatility: they have been known to experience drastic swings in price — sometimes over the course of a single day.
- No dividends. It’s rare for penny stocks to pay dividends, so if you’re an income investor, you may want to steer clear.
Yes, it’s possible to day trade penny stocks on Robinhood. But Robinhood Instant and Gold account holders can only execute up to three day trades in a five trading day period.A day trade is any security that is bought and sold on the same trading day. But day trading is a highly risky trading method. To execute a profitable day trade, you must be able to competently wield numerous trading strategies alongside a robust understanding of the market you plan to trade in.
Even with all the right tools at their disposal, day traders often face sizable losses. And Robinhood isn’t well-equipped to cater to this style of trading. It lacks the advanced charting and analysis tools of several of its competitors, including Webull and Tastyworks. Without advanced charting tools and indicators, day trading penny stocks on Robinhood could lead to uninformed trades that result in crippling losses.
The Pattern Day Trading rule
The Pattern Day Trading rule is set by FINRA and governed by the Securities and Exchange Commission (SEC), and applies to all US brokerages. It limits day trades to three day trades within a five trading day period for anyone with less than $25, in their account. For Robinhood traders, this rule applies to Instant and Gold account holders with less than $25, of equity in their account at the end of the previous trading day. Robinhood states that this restriction helps protect its investors from taking on too much risk — especially new investors with limited equity.
If you place more than three day trades within a five-day trading period, Robinhood marks you as a Pattern Day Trader (PDT) and you can’t place any day trades for 90 days unless you bring your account equity above $25, This rule may frustrate some traders, but is there to protect traders from the substantial risks involved in day trading.
Keep track of how many day trades you’ve made in five days by scrolling down to the Day Trades section from the Investing page of your account.
If you’d like to day trade on Robinhood, there are a couple ways around the platform’s pattern day trading rule:
- Hold a Robinhood Cash account.
- Have at least $25, in equity in your Instant or Gold account at the end of the previous trading day.
Can I day trade if I downgrade to a Cash account?
Yes, you can day trade by downgrading your Robinhood Instant or Gold account to a Cash account. That’s because Robinhood doesn’t impose the same pattern day trading restrictions on Cash account holders.
Those new to Robinhood automatically start with a Robinhood Instant account — a margin account with instant deposit support and extended-hours trading. The primary difference between Cash and Instant accounts is that Cash accounts don’t support instant deposit or settlements.
You can downgrade to a Cash account at any time. If you hold a Robinhood Gold account, downgrade to a Robinhood Instant account by taking the following steps:
- From the Robinhood mobile app, tap Account in the bottom right corner of the screen.
- Tap the three bars in the top right corner of the screen.
- Tap Settings.
- Tap Robinhood Gold.
- Tap Downgrade from Gold.
To downgrade from an Instant account to a Cash account, email the Robinhood customer support team and request the change.
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Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.
While it’s possible to buy and sell penny stocks on Robinhood, the platform only offers access to exchange-traded stocks. And the platform’s pattern day trading rule may limit the number of trades you can execute.
Review your investment options on other trading platforms to find the account that best supports your investment goals.
It can be. According to the SEC, penny stocks are volatile and illiquid, meaning they may trade infrequently and be difficult to sell.
Over-the-counter (OTC) penny stocks are stocks sold through the electronic OTC Bulletin Board (OTCBB) instead of through a publicly traded exchange like the NASDAQ or NYSE.
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