IBKR Penny Stocks: How to Trade Penny Stocks on Interactive Brokers

What are penny stocks?

As its name implies, a penny stock is:

• A micro-cap company that trades at a very low price;
• Highly speculative and risky due to low trading volume, significant bid-ask spreads, and limited information availability;
• Appealing to many investors since it allows them to buy a large number of shares, hoping that they are buying the next Amazon or Apple and expecting a large price increase in the future.

Although penny stocks usually trade below $1, €1, or £1, the SEC changed the criteria to include all shares traded below $5. Some are traded on exchanges, whereas others are traded over the counter (OTC). As such, not all brokers give you access to buy and sell penny stocks. As described in the following sections, penny stocks can offer big profit opportunities. Still, on the other hand, you should be aware that you will be exposed to huge risks due to low liquidity, volatility, and lack of information.

It is worth noting that not all penny stocks are illiquid securities, and you might encounter a penny stock with a high trading volume. Some might be trading at low prices following a sudden decrease in price due to many factors, such as stock splits and changes in the company’s operational outlook. Moreover, some companies have a large number of outstanding shares, and their stock’s fair value is within a low price range.

We deliberately don’t publish a list of specific penny stocks here. The category changes constantly: a share that qualifies today can double next quarter and stop being a penny stock altogether, and companies at this end of the market are delisted more often than most. The section below shows you how to pull the current list yourself inside IBKR, which is more useful than any list we could keep up to date.

Can you trade penny stocks on Interactive Brokers?

Yes, you can trade penny stocks on Interactive Brokers, but not by default. IBKR separates ordinary exchange access from penny stock access, so you have to request an extra trading permission first.

Three conditions apply, according to IBKR’s own documentation:

• You must request the penny stock trading permission and acknowledge IBKR’s Penny Stock Trading Risk Disclosure;
• You must have two-factor authentication active for every trading user on the account, through the IBKR Key security app or a physical Secure Login device;
• You must meet the minimum financial and age criteria required to trade equity options, which is the bar IBKR applies to this permission.

Permission upgrades go through a regulatory review. IBKR states that a request received before 11:00 ET on a business day is normally reviewed by the next business day.

For US securities, the permission you are looking for is listed as United States (Penny Stocks), and it is what gives you access to the OTC Pink and ArcaEdge venues.

How to trade penny stocks on Interactive Brokers

To start trading penny stocks on Interactive Brokers, follow these steps:

1. Open an account at IBKR. If you want, you can check our review before proceeding.
2. After funding your account, add the permission in the Client Portal: click the user menu (the head and shoulders icon, top right), then Settings > Trading > Trading Permissions. Select the penny stock permission for the market you want, and sign the risk disclosure that appears. Menu labels change from time to time, so if the path looks different, search for “trading permissions” inside your account.
3. Find what is available by opening the Trader Workstation (TWS) and going to File > New Window > Scanners > Advanced Market Scanner. Choose the market, then filter by price, for example under $1, or under $5 if you use the SEC definition. You can add volume and market cap filters here too, which is worth doing to avoid the most illiquid names.
4. Research before you buy. Check the historical price to see whether the stock has traded at these levels for a long time or has just collapsed on news. Read the financial statements, and remember that OTC companies disclose far less than listed ones.
5. Decide your position size and your exit levels before you enter. Because penny stocks are volatile and spreads are wide, use limit orders rather than market orders, and check whether the stock is margin eligible, since many are not.

Pros and cons of trading penny stocks

Penny stocks investment tips

After this brief overview of penny stocks, including the risks connected with trading such instruments and the potential returns you might generate, here are a few tips that might be helpful:

• Research the company: you should invest in something you actually understand.
• Use stop-loss orders: it is best to decide on a stop before entering a trade, setting the maximum loss you are willing to bear. Be aware that in an illiquid stock a gap can take you out well below your stop price.
• Keep penny stock fraud in mind: misleading information circulates to inflate the price of these shares, the classic pump and dump. Stay sceptical of promotional messages and update your order limits regularly. This mainly applies to stocks trading OTC, where disclosure requirements are lighter.
• Check the fees: IBKR applies minimum commissions per order, so on a very small trade the cost can be a large percentage of the position. Do the arithmetic before you place it.
• Watch the spread: on thin names the gap between bid and ask can be several percent, which is a cost you pay on the way in and again on the way out.

Bottom line

In conclusion, Interactive Brokers is one of the few brokers that lets you trade penny stocks. You just need the additional permission, two-factor authentication, and to meet the same financial and age criteria IBKR applies to equity options.

Remember that penny stocks are very risky investments due to increased volatility, low trading volume, and limited visibility of the company’s financials and operations. Simply put, it is closer to buying a lottery ticket than to investing. We believe such stocks are suitable only for investors with a high risk tolerance, meaning those willing to accept the risk and able to bear large losses, using money they can afford to lose.

If you need more guidance or have further questions, feel free to reach out to us.