Yes, you can buy penny stocks on Robinhood, but with real limits

Robinhood does let you buy stocks that trade for under $5 per share, which includes most penny stocks. However, Robinhood enforces rules that make penny stock trading harder than it is on some other platforms. The main restriction is that you cannot buy penny stocks in a cash account — you must use a margin account, which means borrowing money from Robinhood to trade. You also cannot buy penny stocks that trade on the OTC (over-the-counter) market, only those listed on major exchanges like NASDAQ or the NYSE.

This matters because many penny stocks trade on OTC markets, so Robinhood's restriction cuts out a large portion of the penny stock universe. If you want to trade the full range of penny stocks, you would need a different broker.

Key Takeaways

  • Robinhood allows you to buy stocks under $5 per share, but only those listed on NASDAQ or NYSE, not OTC markets.
  • You must have a margin account to buy penny stocks on Robinhood; cash accounts cannot hold them.
  • Margin accounts charge interest on borrowed money and carry the risk of a margin call, where Robinhood forces you to sell positions if your account value drops.
  • Penny stocks are highly volatile and illiquid, meaning you may not be able to sell when you want or at the price you expect.
  • Robinhood charges no commission on stock trades, but that does not reduce the risk of losing money on penny stock investments.

What counts as a penny stock on Robinhood

A penny stock is any stock trading below $5 per share. On Robinhood, this includes stocks trading at $0.01 and stocks trading at $4.99. The term "penny stock" is misleading — many trade well above a penny.

Robinhood's restriction applies only to stocks listed on NASDAQ or NYSE. If a stock trades on the OTC market (also called the pink sheets or over-the-counter market), Robinhood will not let you buy it, even if the price is under $5. This is a significant limitation because many penny stocks trade OTC rather than on major exchanges.

Why you need a margin account to buy penny stocks

Robinhood requires a margin account to hold penny stocks. A margin account lets you borrow money from Robinhood to buy securities. A cash account does not allow this — you can only spend money you have already deposited.

To open a margin account on Robinhood, you must have at least $2,000 in your account. Robinhood will charge you interest on any borrowed money, typically ranging from 5% to 12.5% per year depending on how much you borrow and current rates. If your account value drops and your borrowed amount becomes too large relative to your holdings, Robinhood can issue a margin call, forcing you to deposit more money or sell positions when ready to bring your account back into compliance.

This borrowing feature makes penny stock trading riskier than buying stocks with cash you already have. You can lose not only your own money but also owe Robinhood interest on losses.

How to buy a penny stock on Robinhood

The process is the same as buying any other stock on Robinhood. Open the app, search for the stock ticker, tap "Buy," enter the number of shares you want, and confirm the order. Robinhood executes the trade at market price (or a limit price if you set one).

Before you buy, confirm that the stock trades on NASDAQ or NYSE by checking the exchange listing in the stock's details page. If it says "OTC" or "Pink Sheets," Robinhood will not let you purchase it.

Robinhood charges no commission on stock trades, so you pay only the price of the shares themselves. However, there may be a bid-ask spread — the difference between what buyers will pay and what sellers are asking — which can be large for penny stocks with low trading volume.

The real risks of penny stocks on any platform

Penny stocks are extremely volatile. A stock can swing 20%, 50%, or more in a single day. They are also illiquid, meaning there may be few buyers when you want to sell, and you might have to accept a much lower price to exit your position quickly.

Many penny stocks are thinly traded, which means the bid-ask spread can be wide. If you buy at $2.00 per share, you might only be able to sell at $1.80 or lower, losing money before the stock even moves against you.

Penny stocks are also targets for fraud and manipulation. Pump-and-dump schemes, where promoters artificially inflate a stock's price and then sell their shares, are common in the penny stock space. Robinhood's zero-commission model makes it easier to trade frequently, which can lead to overtrading and larger losses.

Alternatives if you want to trade penny stocks Robinhood does not offer

If you want to buy OTC penny stocks, you will need a different broker. Interactive Brokers, TD Ameritrade, and E*TRADE all allow trading on OTC markets, though they may charge commissions or require a minimum account balance. Some brokers also have additional restrictions on OTC trading, such as requiring a minimum stock price or limiting the number of OTC trades per day.

Before switching brokers, consider whether OTC trading is worth the added complexity and cost. OTC stocks are riskier than exchange-listed stocks because they have less regulation and transparency. The bid-ask spreads are often much wider, and finding reliable pricing information is harder.

Frequently Asked Questions

Can I buy penny stocks in a Robinhood cash account?

No. Robinhood requires a margin account to hold penny stocks. If you try to buy a penny stock in a cash account, the order will be rejected. You must have at least $2,000 to open a margin account.

What happens if I buy a penny stock and it gets delisted?

If a stock is delisted from NASDAQ or NYSE, you can still hold it on Robinhood, but you cannot buy more shares. You can sell your existing shares, though the price may be much lower. Delisted stocks often become OTC stocks, and Robinhood does not support OTC trading.

Does Robinhood charge interest on a margin account if I do not borrow?

No. You only pay interest on money you actually borrow. If you have a margin account but buy stocks only with your own cash, you pay no interest. However, you must maintain the $2,000 minimum balance to keep the account open.

Can I set a limit order on a penny stock?

Yes. You can set a limit order to buy or sell a penny stock at a specific price. This is often a good idea for penny stocks because they are volatile and illiquid. A limit order ensures you do not overpay on the way in or accept a price that is too low on the way out.

Why does Robinhood not allow OTC penny stocks?

OTC stocks have less regulation and transparency than exchange-listed stocks. Robinhood likely restricts them to reduce fraud risk and to avoid the operational complexity of settling OTC trades, which can take longer and have higher failure rates than exchange trades.