E*TRADE penny-stock trading is available for many eligible OTC securities. ETRADE from Morgan Stanley charges $6.95 per online OTC trade, or $4.95 for customers who make at least 30 qualifying stock, ETF and options trades per quarter. ETRADE does not list every penny stock, may require limit orders, does not permit short selling of OTC securities and does not support direct fractional purchases of OTC stocks.
E*TRADE Penny Stock Trading: at a Glance
| Feature | E*TRADE policy |
|---|---|
| Trade OTC penny stocks | Yes, if the security is eligible |
| Online OTC commission | $6.95 per trade, or $4.95 with at least 30 qualifying stock, ETF and options trades per quarter |
| Market orders | May be restricted; E*TRADE may require a limit order |
| Short selling OTC stocks | Not permitted |
| Fractional purchases of OTC stocks | Not permitted |
| Securities with severe trading restrictions | May be unavailable for new purchases |
| Risk acknowledgment | May be required before buying OTC securities |
E*TRADE's standard $0 online commission applies to eligible U.S. exchange-listed stocks. It does not generally apply to OTC securities.
What Counts as a Penny Stock?
A penny stock generally refers to a low-priced security issued by a small company, often trading below $5 per share. Many penny stocks trade over the counter, but the terms "penny stock" and "OTC stock" do not mean the same thing.
Some stocks priced below $5 trade on Nasdaq or the New York Stock Exchange. Those stocks may not meet the SEC's legal definition of a penny stock because of listing or issuer exemptions.
The distinction affects trading costs. An eligible U.S. exchange-listed stock may qualify for E*TRADE's $0 online commission, while an OTC stock generally incurs the separate OTC commission.
How Much Does E*TRADE Charge for Penny Stocks?
E*TRADE charges $6.95 per online OTC stock trade. The commission drops to $4.95 for customers who execute at least 30 qualifying stock, ETF and options trades per quarter. The fee applies to OTC stocks, OTCBB securities, Grey Market securities and OTC-traded foreign securities.
For small trades, the commission can take up a large share of the investment:
- A $6.95 commission on a $100 purchase equals 6.95% of the trade value.
- Buying and later selling $100 of an OTC stock would create $13.90 in commissions before spreads and other charges.
- A $500 round trip would cost $13.90 in commissions, equal to 2.78% of the trade value.
That pricing is more suitable for larger or occasional OTC trades than for very small, frequent transactions.
Does E*TRADE Offer Every Penny Stock?
No. E*TRADE can restrict or reject individual OTC securities. A security may be unavailable if the issuer does not provide current financial information, is insolvent, is under regulatory investigation or suspension, or does not meet public-company reporting requirements.
E*TRADE also states that opening transactions are not permitted for certain securities classified as Caveat Emptor, No Information, Grey Market or Expert Market securities.
If a stock you already own moves to the Expert Market, selling may be possible only under limited conditions. In some cases, selling may not be allowed.
What Order Should You Use for an E*TRADE Penny Stock?
A limit order is generally the more controlled choice for an OTC penny stock. It lets you set the highest price you will pay when buying or the lowest price you will accept when selling. E*TRADE may restrict market orders and require limit orders for some OTC securities.
OTC securities may have:
- Wide bid-ask spreads
- Low trading volume
- Delayed executions or execution reports
- Quotes that are not current
- Large price movements from relatively small orders
E*TRADE warns that displayed OTC pricing may not be current and that an execution may differ materially from the quoted price.
Do You Need Approval to Trade Penny Stocks on E*TRADE?
You may need to accept E*TRADE's Over-the-Counter Securities Acknowledgment before buying eligible OTC securities. E*TRADE states that failing to provide the acknowledgment may prevent you from buying these products.
For covered penny-stock transactions, SEC rules generally require a broker to provide a penny-stock risk disclosure, obtain the customer's acknowledgment and determine whether the transaction is suitable under the applicable rules.
The SEC also states that a broker may have to wait at least two business days after delivering the disclosure before executing a customer's first covered penny-stock trade.
How to Buy a Penny Stock on E*TRADE
- Search for the ticker symbol on E*TRADE.
- Confirm whether the security is exchange-listed or OTC.
- Review the company's filings and financial information. You can use SEC filings through EDGAR and check the security's OTC market tier, reporting status and compliance flags.
- Read and accept the OTC disclosure if E*TRADE requires it.
- Use a limit order instead of assuming a market order will execute at the displayed quote.
- Review the commission and estimated order value before submitting the trade.
- Confirm the execution. The order may fill only partially or may not execute.
FINRA warns that limited company information, low trading volume and price manipulation are major risks in low-priced securities.
Important E*TRADE Restrictions
E*TRADE's OTC rules can affect both order execution and security availability. Its OTC disclosure states that:
- E*TRADE may reject an order or restrict a security without guaranteeing that the security will remain available.
- OTC securities may be subject to trading halts or account-level restrictions.
- Market orders and other order types may be limited.
- Short selling OTC securities is not permitted.
- Direct purchases of fractional OTC shares are not supported.
Bottom Line
You can trade eligible penny stocks on E*TRADE, but the platform is better suited to occasional OTC trades than to very small, frequent transactions. Before placing an order, check the security's eligibility, review the commission, confirm which order types are available and account for the bid-ask spread.