While market giants like Microsoft and Amazon now boast sky-high share prices, there was a time when they traded for just a few dollars per share. Their success proves that even relatively unknown companies with small market capitalisations — often called penny stocks — can grow into major success stories, potentially delivering life-changing returns to early investors.
This is what drives many investors to explore penny stock trading in hopes of finding the next Apple or Meta. However, before diving into trading penny stocks, it’s essential to understand both the potential rewards and the significant risks associated with this volatile asset class.
Let’s find out how to trade penny stocks!
What are penny stocks?
Penny stocks are shares of small companies that usually trade for less than USD 5 per share.
While a few can be found on major exchanges like the New York Stock Exchange (NYSE), most are traded through over-the-counter (OTC) markets instead of regular stock exchanges.
Because penny stocks are traded less often and have fewer buyers and sellers, they usually have low liquidity — meaning it can be harder to buy or sell them quickly at your desired price. These stocks also come from smaller companies that don’t always have to follow the same strict reporting rules as larger firms.
As a result, penny stock trading is considered high-risk and highly volatile. If you’re planning to invest in penny shares, it’s important to research carefully and understand the risks before making a purchase.
How to trade penny stocks
Use an online brokerage
You can start penny stock trading by opening an account with an online brokerage that offers OTC trading. Many brokers now include OTC stocks in their platforms, making it easier for investors to buy penny shares directly online.
Hire a stockbroker
If you prefer professional help, you can work with a licensed stockbroker to handle penny share trading or OTC transactions on your behalf. However, keep in mind that this option often comes with higher fees.
Trade penny stocks through CFDs or derivatives
Another way to invest in penny stocks is by using financial derivatives such as Contracts for Difference (CFDs), options, or futures. With CFDs, you can potentially profit from price movements in either direction — going long if you expect prices to rise or going short if you anticipate a drop.
Remember, your profit or loss will depend on whether the penny stock price moves in the direction you predicted.
Interested in trading stocks but not sure how? Read our 5-step guide.
Why invest or trade in penny stocks?
Minimal Capital Requirement
Many investors are drawn to penny stock trading because of the low share price.
It’s appealing, right?
With just a small budget, you can purchase thousands of penny shares, while the same amount might only get you a few shares of a larger company. This makes it much easier for new investors to buy penny stocks without needing significant capital.
Potential for higher short-term returns
Penny stock prices can be highly volatile, moving up and down much more sharply than larger company stocks. This creates exciting opportunities for higher returns if the price swings in your favor.
But remember, the risk of loss is just as high. Penny share trading can magnify both your gains and losses.
Long-term growth potential
Some investors buy penny stocks hoping to find the next big success story. If the company behind the stock grows into a strong, stable business, early investors could see significant long-term returns. This possibility makes investing in penny stocks appealing for those willing to take on higher risk for potentially greater rewards.
How to find penny stocks
Wondering where to begin trading penny shares?
Here’s where to start:
OTC Markets
A great starting point for newcomers is OTC Markets, which lists over 17,000 OTC securities [1]. You can search and trade penny stocks that aren’t listed on major stock exchanges. The listed companies are categorized into three tiers, based on the quality and quantity of their information and disclosure— helping you assess the risk level before you invest [2].
Penny stock websites and news portals
Another great option is dedicated platforms like pennystocks.com, which provide up-to-date lists of the top penny stocks being traded on major exchanges like the NASDAQ, NYSE, OTCQX, OTCQB, and Pink Sheets [3]. These websites are particularly helpful for anyone learning how to start trading penny stocks.
Financial blogs and investing forums
Let’s not forget about online communities.
You can find penny stock discussions, recommendations, and analyses on personal finance and investment blogs, as well as market news sites. These communities can give you valuable insights into penny stock investing trends and allow you to learn from other traders’ experiences.
Examples of penny stocks
By definition, a penny stock is any stock that trades for under USD5 per share, which means you can find penny stocks across multiple different industries and sectors [4].
The following list of Top 10 penny stocks on the NASDQAQ and NYSE illustrates the diverse nature of the asset class. The companies listed below are only presented as examples of penny stocks and not a recommendation for investment.
| Penny stock | Industry |
| Faraday Future Intelligent Electric Inc. (FFIE) | Automotive |
| Sorrento Therapeutics, Inc. (SRNE) | Biotechnology |
| iQIYI, Inc. (IQ) | Media entertainment |
| Selecta Biosciences, Inc. (SELB) | Biotechnology |
| Agenus Inc. (AGEN) | Biotechnology |
| Clovis Oncology, Inc. (CLVS) | Biotechnology |
| Nano Dimension Ltd. (NNDM) | Hardware |
| BlackSky Technology Inc.(BKSY) | Hardware |
| View, Inc. (VIEW) | Construction |
| Cronos Group Inc. (CRON | Pharmaceuticals |
Where to Buy Penny Stocks?
Looking to start trading penny stocks? Before settling on a particular online brokerage platform, traders should thoroughly research and understand the unique features each one offers to ensure it aligns with their trading preferences.
With Vantage, you can take advantage of the flexibility offered by stock CFDs. By signing up for a live account today, you’ll be able to trade penny stocks and capitalize on both rising and falling markets — whether you’re going long or short. Vantage makes it easy to get started with a trusted, multi-asset broker, so you can trade confidently and effectively
Risks of trading penny stocks
Penny stocks may seem like an attractive investment option, but they come with their own set of risks. Here’s what to keep in mind when investing in penny stocks:
Lack of company information
Penny stocks are subject to less strict reporting standards compared to larger, more established companies. This means there’s less available information about the company, or it may be difficult to verify. As a result, investors may miss red flags that could indicate potential problems.
Little to no company history
Many penny shares come from companies that are either newly listed or nearing the end of their business life. Without a track record, it’s hard to gauge the future potential of these stocks, making it riskier to invest in them.
Low liquidity
Since penny stocks typically have low market capitalisation, there’s a risk of low liquidity. This can make it difficult to buy or sell your stocks, and you may have to accept a lower price than you expected because there might not be enough buyers or sellers in the market.
Penny stock scams
Unfortunately, scams are more common with buying penny shares online. One issue is that penny stocks often come from companies with unclear backgrounds, leaving you vulnerable to purchasing a shell company that has no actual business operations and revenue.
What’s worse?
The low market capitalisation of penny stocks makes them more susceptible to price manipulation, such as pump-and-dump schemes. In these cases, scammers artificially inflate the stock price and then sell off their shares, leaving unsuspecting investors with losses. Some small-cap companies also pay influencers and media outlets to create biased content, further misleading potential investors.
The takeaway?
While penny stock trading can offer high rewards, it also comes with significant risks, especially if you don’t do your research. Stay alert and make sure you understand the risks involved before diving in..
Penny stocks – high risk, high reward
It’s important to understand that penny shares are highly volatile and come with a higher level of risk compared to larger-cap stocks. Additionally, there are extra dangers to watch out for, such as the increased potential for scams and the lack of credible, verifiable information.
Penny stock trading may not be suitable for every investor. If you’re familiar with how to trade penny stocks, it’s essential to manage risk carefully, use leverage sparingly, and trade within your acceptable risk tolerance.
Frequently Asked Questions
How to invest or trade in penny stocks?
You can start investing/trading in penny stocks through the following ways:
- Trade penny stock CFDs on platforms like Vantage, allowing you to trade without owning the share.
- Open an online brokerage account that offers OTC (over-the-counter) trading, where most penny stocks are listed.
- Hire a licensed stockbroker to trade penny stocks, though this usually comes with higher fees.
Where do you buy penny stocks?
You can find and trade penny stocks on:
- OTC Markets, which is a major platform where you can search and review listed penny stocks.
- Penny stock websites such as pennystocks.com share updated lists of top penny stocks traded.
- Online brokerage platforms that support OTC and small-cap trading.
Before you buy, always make sure your broker for penny stocks is licensed and offers transparent pricing and execution. This helps reduce risks commonly associated with penny stock investing.
Is trading penny stocks suitable for beginners?
Despite the appeal of low-priced shares, penny stock trading is generally not ideal for beginners due to its high volatility, limited company transparency, and higher risk of scams.
However, new traders can gain indirect exposure through CFD trading on platforms like Vantage, allowing them to speculate on price movements without owning the actual shares.
If you’re just starting, begin with small trades, use a reliable broker, and never invest more than you can afford to lose. Take time to research companies, manage your risk carefully, and stay alert to potential scams.
References
- “Stock Screener – OTC Markets”. https://www.otcmarkets.com/research/stock-screener. Accessed 10 March 2023.
- “OTC Markets Group Inc – Investopedia”. https://www.investopedia.com/terms/o/otc-markets-group-inc.asp. Accessed 10 March 2023.
- “List of Penny STocks – Pennystocks.com”. https://pennystocks.com/list-of-penny-stocks/. Accessed 10 March 2023.
- “Penny stock – Corporate Finance Institute”. https://corporatefinanceinstitute.com/resources/capital-markets/penny-stock/. Accessed 10 March 2023.
- “List of Penny STocks – Pennystocks.com”. https://pennystocks.com/list-of-penny-stocks/. Accessed 10 March 2023.
