Penny stocks offer investors an opportunity to invest in young startups and exciting new ventures. These stocks can be highly volatile and aren’t regulated as tightly as stocks from more established companies, so they’re typically best for risk-tolerant investors.
If you’re a Robinhood user or are thinking about signing up for a Robinhood account, though, there are some limits on the types of penny stocks you can trade. In this guide, we’ll explain everything you need to know about penny stocks on Robinhood and highlight some alternative brokers that may offer more penny shares. Let’s dive in!
What are Penny Stocks?
Penny stocks are any stocks that have a price of less than $5 per share. In many cases, penny stocks have a price of less than $1 per share. These stocks are often issued by young startups and small companies that want access to capital from public markets but have very low market capitalizations.
An important thing for investors to note about penny stocks is that they’re not subject to the same reporting requirements as many major stocks, so it can be hard to find out much about a company’s financials. Investors need to be very cautious about investing in scams or near-bankrupt businesses when trading penny stocks.
Can You Invest in Penny Stocks on Robinhood?
Robinhood has exploded in popularity over the past several years, and many traders who join the commission-free brokerage want to trade penny stocks. So, can you trade penny stocks with Robinhood?
The answer is both yes and no.
Robinhood offers trading on around 5,000 stocks from the NASDAQ and NYSE stock exchanges, both of which include stocks that trade for less than $5 per share. While these stocks meet the definition of penny stocks, they are typically offered by reputable companies that are tightly regulated by the SEC. In many cases, these penny stocks aren’t the lightly regulated, highly volatile stocks that traders typically think of.
However, Robinhood doesn’t offer trading on OTC (over the counter) markets, which is where the vast majority of penny stocks trade. Penny stocks trading on OTC markets can have share prices as low as a fraction of a cent. The penny stocks that trade on OTC markets, and aren’t available on Robinhood, are the penny stocks that traders are usually referring to.
Pros and Cons of Trading Penny Stocks with Robinhood
There are benefits and drawbacks to trading penny stocks with Robinhood. The main benefit, of course, is that trading with Robinhood is commission-free. In addition, the brokerage app makes it easy to discover new penny stocks to trade and enables you to trade on margin (with a Gold account).
On the other hand, Robinhood can suffer from slow execution speeds. That can be a major problem when trading penny stocks, since these shares often trade with low liquidity. Delays in trade execution can have a significant impact on the prices at which your orders are fulfilled.
The biggest downside to trading penny stocks with Robinhood is that, as we noted, you can’t trade OTC stocks with this broker. Since most penny stocks trade on OTC markets, Robinhood users miss out on tens of thousands of potential companies in which to invest.
Alternatives to Robinhood for Penny Stock Investing
While it may be very popular, there are some alternatives to Robinhood out there that are worth taking into consideration. It’s possible to get access to OTC penny stocks simply by choosing a broker other than Robinhood. Commission-free brokers like E*TRADE, Charles Schwab, and TD Ameritrade all offer trading on OTC markets. In addition, brokers like TradeStation and Interactive Brokers also allow you to invest in penny stocks that trade OTC.
It’s worth noting that these brokers all allow you to trade the same selection of NASDAQ- and NYSE-listed penny stocks that are available on Robinhood.
Conclusion: Penny Stocks on Robinhood
Robinhood allows you to invest in penny stocks that trade on the NASDAQ and NYSE exchanges. However, you cannot buy or sell penny stocks from the OTC markets – which is where the majority of penny stocks trade – with Robinhood. If you want to invest in penny stocks, you can get access to a wider range of shares than is available on Robinhood by using an alternative brokerage that offers trading on OTC markets.