Can you buy penny stocks through an individual retirement account (IRA)?

The short answer: yes. The more important question, however, is how exactly to go about it, and whether it is ultimately advantageous for your overall net return.

Investing in penny stocks requires a high degree of speculation, not to mention the fact that they are notoriously risky.

Penny stocks represent shares traded at a substantially lower price and are typically associated with companies of low market capitalization.

The criteria for what constitutes penny stocks specifically vary from investor to investor. Some argue that penny stocks are those traded under $1.00; others contend they are those traded under $5.00. Another wider definition includes penny stocks as all those traded external to major markets (like the NASDAQ or LSE).

In addition to less liquidity (meaning undesirable bid-ask spreads), penny stocks are subject to less stringent regulatory standards—calling into question the reliability of penny stock firms, as well as the companies with which they are potentially associated.  

Some IRAs (but not all) invest in penny stocks, which are often traded through Pink Sheets and the OTCBB (Over-the-Counter Bulletin Board). Individual investors tend to work with brokerages that permit IRAs.

The more established brokerages allowing for trade in penny stocks include TD Ameritrade, E*Trade, and Scottrade. To help chances of profitability, it is particularly important to ensure low transaction fees, given the eponymously low price of penny stocks. In most cases, brokerage IRAs are preferable to a self-directed custodian IRA.

The fact that penny stocks are so cheap, however, should not necessarily be the primary factor in your decision-making, given their high-risk nature.

Potential penny stock traders should carefully assess their risk tolerance when deciding whether penny stocks are an appropriate use of their IRA funds. Additionally, a good risk management strategy includes researching whether a particular broker is DTCC (Depository Trust & Clearing Corporation) eligible, which is responsible for the clearing of securities for brokerages. The fact that a certain stock is imposed by heavy restrictions, or is DTCC ineligible, are often clear indicators that it may be extremely difficult for an investor to sell the stock’s shares after their purchase.  Also, higher trading fees when buying or selling a penny stock are often a by-product of DTCC ineligibility. Diligent research of restrictions, prices, and regulatory restrictions are crucial elements in deciding to open an IRA account for penny stock trading.

It is important to remember overall that investors who do well stock market trading are not usually blessed with any particular kind of luck. Rather, they incorporate risk-averse strategies to high-yielding opportunities.

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