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Trading in penny stocks can be an incredibly risky venture. Despite the risks, some investors are drawn to penny stocks for the chance to earn big profits with just a small investment. Here’s what you need to know about penny stocks in Canada.

Trading in penny stocks can be an incredibly risky venture. Despite wildly successful tales from investors who’ve claimed to earn triple-digit returns on penny stocks, the reality is most penny stock will likely go to zero.

One of the most famous penny stocks in Canada is Bre-X Minerals, the Calgary-based exploration company whose stock soared from 30 cents per share to more than $250 before being exposed as a fraud in 1997.

Still, for some investors, the allure of turning a small penny stock investment into a 10-bagger is too tempting to pass up. If you’re one of those investors, this article will explain everything you need to know about penny stocks, including why and how to invest in penny stocks in Canada.

What Are Penny Stocks?

A stock doesn’t necessarily need to trade for under $1 to be considered a penny stock. Technically, penny stocks are defined as micro-cap stocks, meaning a stock with a market capitalization between $50 and $300 million. If the company is valued at less than $50 million, it is considered to be a nano-cap stock.

Compare this to the largest 10 stocks trading in Canada (think banks, telecommunications, and pipelines), which have a market capitalization of between $35 billion and $100 billion, and you can see why trading smaller stocks can be riskier than investing in large blue-chip companies.

The Securities & Exchange Commission (SEC) defines penny stocks as any stock trading for less than $5. Another definition is that any stock trading over-the-counter (OTC) or on pink sheets should be considered a penny stock.

Typical Penny Stock Traits

The majority of penny stocks in Canada fall into these categories and sectors:

  • Oil & Gas
  • Mining (i.e. Gold, Silver)
  • Pharmaceutical
  • Biotechnology
  • Cannabis

All are highly speculative industries and so these penny stocks are extremely sensitive to macro factors such as commodity price movements, industry news (both good or bad), or regulatory changes.

Think of it this way: a penny stock trading for 50 cents per share sees its share price fall by 10 cents on negative industry news. A seemingly benign 10-cent move is equal to a 20% loss on your investment!

Penny stocks are extremely risky and typically represent companies at opposite ends of the spectrum: from companies in their incubation phase with nothing more than an idea and some venture capital behind them looking to break out, to established debt-laden companies who are on the verge of bankruptcy. Other penny stocks might be outright scams (see Bre-X).

Why Are Penny Stocks So Risky?

Penny stocks make risky investments for several reasons:

  1. Transparency / Lack of Public Information: Companies listed on the pink sheets or over-the-counter are not required to file with the Securities & Exchange Commission like larger stocks traded on an exchange. That makes it difficult to find tangible information on penny stocks.
  2. No Minimum Standards: Sometimes, the only reason why a stock is not traded on a major exchange is because it failed to meet the minimum standards to be listed. These standards include annual listing fees and timely filing of financials.
  3. Lack of History: Whether the company is newly formed or approaching bankruptcy, many penny stocks generally have poor track records or none at all.
  4. Low Liquidity: Stocks trading over-the-counter or on the pink sheets have low liquidity, meaning investors cannot easily buy or sell shares without finding a willing buyer or seller. Low liquidity also leads to price manipulation and the threat of scams.

Penny Stock Scams

The classic penny stock scam is known as the pump and dump. Famously portrayed in movies such as Boiler Room and The Wolf of Wall Street, pump and dump scams occur when an investor buys large amounts of stock, hypes it up to unsuspecting retail investors, and then sells it once investors have sufficiently bid up the price.

Another scam to watch for includes biased (or paid) recommendations from newsletters and social media that persuades investors to purchase a particular penny stock that’s poised to skyrocket.

Why Trade Penny Stocks?

If you decide to trade penny stocks, you need to do so with eyes wide-open. Despite the risks, some investors are drawn to penny stocks for the chance to earn big profits with just a small investment. Who doesn’t love a good investing success story?

Let’s say you bought 2000 shares of a penny stock trading at 46 cents per share. That’s a $920 investment (maybe a ‘bet’ is more accurate) in that penny stock. If that stock happens to reach $1 then you’ll have more than doubled your initial investment.

To get that elusive 10-bagger (10x its purchase price) the stock would need to reach $4.60. If that happened, then your initial $920 investment would now be worth $9,200.

Still, the more likely scenario is the share price stays under $1 and possibly goes to zero if the company fails.

The extreme risk and volatility of penny stocks mean investors need to do their homework before making an investment. Rather than trying to hopelessly pick one winner, a better strategy might be to take the venture capitalist approach and divide your investment among 5-10 penny stocks – diversifying your risk and increasing the chances of finding the elusive winner.

Be extremely wary of any online newsletter promoting the best penny stocks to buy in Canada. As mentioned above, there’s no way to tell if the information is biased and/or part of a scam to promote a particular stock to benefit someone who already has a position and is waiting for you to buy so they can unload.

Finally, don’t invest more than you’re willing to lose. Investing in penny stocks is akin to gambling and should only be done outside of your core TFSA and RRSP holdings and never with money that you’re counting on to fund your retirement.

How to Invest in Penny Stocks

As mentioned, penny stocks can only be purchased over-the-counter or on the pink sheets. So how does the average retail investor purchase penny stocks to trade in their own portfolio?

To buy penny stocks in Canada, you’ll need to go through a broker – and the best way to do that is through an online discount brokerage. Our favourite online discount brokerage is Questrade, where you can get $50 in free trades when you open a new self-directed invested account.

Questrade provides traders with access to the Over The Counter Bulletin Board (OTCBB) to allow them to trade smaller cap and more thinly traded stocks that are regarded as high risk (i.e. penny stocks).

With Questrade, you can trade stocks for as little as 1 cent per share with a $4.95 minimum and up to a $9.95 maximum. Or simply choose a $4.95 flat rate per trade.

Investors looking to trade penny stocks may want to access Questrade’s active investor platform that provides deeper level market data and research. You can find OTC Bulletin Board level 1 and level 2 quotes, plus Pink OTC market level 1 and 2 quotes.

Investors can trade penny stocks at other discount brokerages besides Questrade and so you might want to review our ultimate guide to Canada’s discount brokerages to find a brokerage that best suits your needs. You can also check out our full Questrade review for all the reasons why we love this online trading platform.

Where to Find Out More About Which Penny Stocks to Invest?

I write this with great hesitation, as information on penny stocks can be extremely unreliable. In addition, news travels fast and so take any stock specific or industry recommendation with a huge grain of salt because that information is or should already be priced into the market.

Here are two sources for penny stock information that seem reputable:

Small Cap Power: “The industry’s leading and most trusted source for small-cap stock coverage, research, and analysis.” SmallCapPower covers a wide-range of penny stocks in industries such as gold, base metals, energy, technology, sustainability, marijuana, battery metals, and blockchain. One of its columnists is Canadian author and active trader Robin Speziale.

The site is loaded with all of the latest news and insights of small-cap companies. Check out their top 10 Canadian marijuana stock picks as an idea of where to start investing in the cannabis sector.

All Penny Stocks is another good source of information to use as a starting point for investing in penny stocks. This site features more detailed analysis and charts for investors to sort through, including penny stocks to watch – a feature that uses technical analysis to identify hot penny stocks.

Remember, these sources are just starting points to give you an idea of penny stocks in which to invest. Do your own research to determine whether it’s a worthwhile investment and make sure you understand the risks before putting your real money on the line.

Final Thoughts

We’ve all heard of successful penny stock stories, and wouldn’t it be nice if we had our own tale of earning triple-digit returns on a penny stock investment?

The fact is, penny stocks are some of the riskiest investments out there and investors need to be cautious. Know that you’re trading on what little public information is available, and what is available may be unreliable.

Be prepared to lose money, maybe even all of it if the company goes bankrupt or turns out to be a scam. Penny stocks should only make up a tiny fraction of your portfolio and never be counted on for your retirement savings plan.

Investing in penny stocks is like taking a big swing for the fences in baseball. You may hit a home run, but more than likely you’ll strikeout. With that mindset and eyes-wide-open, you can try your luck at penny stocks and hopefully find that diamond in the rough.

Article comments

Jason Fedorchuk says:

I found your article to be accurate and truthful, giving the warnings and potential gains. I worked for a broker-dealer in penny stock investing back in the late 1990’s. When the movie Boiler Room came out and the provincial securities commission started investigating bad trading practices amongst securities firms financing penny stocks and revoking licenses for brokers. These firms were not regulated by the Investment Dealers Association-IDA, who keep watch over the securities trading policies and practices and investigate investor complaints about wrongful treatment and fraudulent business contracts. So, I know too well the scope of living the life of the movie Wolf On Wallstreet. I did not stay long with the firm about 3 years in total and ventured with a regulated IDA firm, just when the Twin Towers in New York city, September 09 fell victim to the terrorists attacks. I resigned from being a Financial Advisor few months after this event due to a relationship failure and entered the construction industry, where I have been for two decades, barely surviving and always having to find work which there is plenty of if you really hold down your position and make decent money. One thing I found is most construction workers work from paycheck to paycheck hardly at all consider investing their hard earned money into the markets. Now I’m happy to read your article and that you gave two penny stock sources to be reputable. As I am considering to re-enter the financial markets as a Financial Advisor. As I am beginning to feel the aches and pains struggling in the trades, and know I have the background experience to selecting a data base of potential clients from the construction industry to invest small amounts of capital into the markets with zero upfront commissions. Your article just strengthened my career move and making my sources fit and work perfectly. Thank you for posting your article. It was fulfilling to read, and remind myself of the hunger and excitement investing can be. I know I will succeed with the maturity I have gained over the years.

Mark Brokenshire says:

Great info thank you

Matthew Silva says:

Great post Tony.

Tony Desousa says:

Everyone keeps saying Questrade is the best. While Questrade does have a good platform and easy, i decided to leave after being with them for about 8 years. I think people should be aware that Questrade is not the best, as far as I’m concerned, National Bank Direct Brokerage is the best. If you have 3000 dollars to leave in an account at National Bank and open the trading account and make 100 trades every quarter, your commision is 95 cents a trade. And do you know how easy it is to make that many trades? It is easy because the brokerage is no longer eating your profits, like Questrade does. They are not cheap for todays prices. Yes, when I joined them, they were cheap comparing to other brokerages, but there were a lot of times that i wanted to get rid of a stock because when you add one penny per share, plus ECN charges, i ended up not even making for the commission. You are looking at 9.95 for 100 shares plus ecn fees. So that’s 20 dollars plus ecn fees, and yes,it seemed like i always paid ECN FEES. Don’t listen to people who recommend them. Check for yourself because these days, commisions are low. It always makes me wonder, why people dont recommend National Bank Direct Brokerage. I don’t know why, but sometimes makes me wonder if some get paid by Questrade for recommending them. Maybe not, but sometimes i wonder about some. Do your research and don’t listen to people recommending them.

Robb Engen says:

Hi Tony, thanks for sharing your experience with Questrade and National Bank. You’re right that declaring one broker “the best” is highly subjective. Your mileage may certainly vary depending on what type of investor you are and how you trade.

We find Questrade has the most compelling and robust offering to serve the vast majority of self-directed investors, but of course other brokers may perform better in specific niches.

Jas says:

Hello Tony,
I am very new to trading but yes, I find questrade very expensive for ECN fees all the time. I have even paid them $80-90 on each trade where I made barely $20 and they claim its not there fee.
Also, there customer service is very poor waiting time on chat as well as call is around 3 hours, if you didn’t get disconnected in between. else start from beginning again.
Tony, How’s national Bank in terms of ECN fees or other hidden charges?

John Rosebrugh says:

I just renewed my old account with TD and I am shocked that I have been treated so badly. So I’m wanting to find another and I haven’t even made one trade.
I hear about some like Scotia where the connections are just lost and you can’t trade.
How does National Bank Direct Brokerage compare?