The NASDAQ is at all-time highs now so many Robinhood users are looking to grow their accounts by buying and selling penny stocks.
In this guide, you will learn how to buy penny stocks on the Robinhood app plus some helpful tips to avoid issues like the Pattern Day Trading ban and margin calls.
What is Robinhood?
Robinhood is a commission-free trading broker that extremely popular with the millenial crowd.
You can buy and sell penny stocks plus trade options as well.
It's free to create an account and start trading today.
Robinhood is only available for USA & UK residents (If you live outside these countries then try Interactive Brokers a a good alternative).
Robinhood Account Types
Robinhood has 3 different accounts for buying penny stocks: Instant, Gold, and Cash.
When you join Robinhood, your account is automatically an “Instnat Account” with the ability to trade with instant deposits and during extended hours.
Robinhood Gold is a margin plan that costs $5 but gives you some added perks. You can trade on margin plus receive bigger instant deposit limits.
I don' recommend buying penny stocks on margin due to their high volatility. If you're a beginner you could compound your losses and end up owing Robinhood a lot of money.
It's simple to turn off the Margin feature within Robinhood Gold or you can set a margin limit. It's best to avoid trading on margin with penny stocks altogether.
Cash accounts are a downgrade from Instant accounts because you must wait a few business days for your deposit to clear. This account allows you to avoid the common Pattern Day Trading ban, which I'll talk about more later in this article.
Finding Penny Stocks on Robinhood
Once your account is active, search Robinhood to find potential penny stocks to buy.
Penny stocks are stocks worth less than $5. Robinhood only lists companies trading on the NASDAQ or NYSE. You cannot buy OTC penny stocks on Robinhood so try a different broker like Fidelity or eTrade instead.
Avoid the Pattern Day Trading Rule
A common problem smaller Robinhood traders will experience is not being able to make more than 3 intra-day trades (day trades) per week.
This is known as the Patter Day Trader Rule. This prevents more than 3 day trades every 5 days for accounts less than $25,000.
The SEC enforces this rule and if you break it Robinhood will ban you from trading for 90 days.
I've been banned twice for breaking this rule so read carefully to avoid getting caught up.
The quickest way to avoid this barrier is to deposit at least $25,000 in your Robinhood account before you start buying penny stocks.
Of course, many Robinhood users cannot do this so there is another way to avoid the PDT ban.
Do not make more than 3 day trades within 5 trading days. A trading day is considered a day when the market is open. It doesn't go by the weekly calendar.
For example, If you place a day trade on Wednesday, Thursday, and Friday, you cannot place another day trade until Wednesday or you will be marked as PDT.
Break this rule and you'll receive a 90 day ban so be careful.
A Solution to PDF? Use Cash Account
If you want to day trade more than 3 times per 5 trading days then downgrade to a cash account.
You'll have to wait a few business days for your deposits to clear but you can trade with a lot more freedom.
You must do this before you receive a 90 day PDT ban. If you are already banned then you'll have to wait the full 90 days to trade again. Downgrading to a cash account during the ban won't change anything.