Experienced investors with a high risk tolerance sometimes turn to penny stocks. Penny Shares is a company that trades for a share price of under $ 5; However, penny stocks can often be less than $ 1, as the name suggests. So, you can see why rookie investors are lured by dreams of buying a company for just a few cents and then selling shares for a huge profit when the price trades back in the multi-dollar rate. The extremely low share price allows investors to hold thousands of shares for relatively small investment capital. With that scale, a gain of just a few cents per share could translate into a sizable percentage return; However, it’s important to note the converse is also true, of course.
Of course, such stocks are considered highly speculative due to lack of liquidity, large bid-ask spreads, small market capitalization and the following limitations and disclosures. If you feel ready to start trading penny stocks, here are some guidelines.
Where to Buy Penny Stock
Some penny stocks are traded on regular exchanges such as the Nasdaq. However, major stock exchanges, such as the NYSE and Nasdaq, have special listing requirements. For example, according to Nasdaq Rule 5550 (a), failure to have a minimum bid price of at least $ 1 per share for primary equity will result in withdrawal.
As such, literal penny stocks trade for less than $ 1 per share, as well as some stocks under $ 5 per share, mainly traded on over-the-counter bulletin boards (OTCBB), and through the Pink Sheets. The Pink Sheets is simply a quote publisher, while OTCBB holds little legitimacy as it keeps some list requirements to a minimum. Pink Sheets stock is not registered with the SEC, or subject to listing requirements, and therefore carries a much greater risk.
How to Choose a Penny Stock Broker
Stock brokers play a fundamental role in the trading business. They provide the necessary trading infrastructure and can significantly influence investors’ trading preferences, behavior and patterns.
When looking for a penny stock broker, one aspect to take into account is their fee structure. Some brokers charge a commission on a per share basis. This structure is usually set at a certain level for the first specified number of shares, and then another rate for each additional share. This structure is more suitable for investors who buy a relatively small number of stocks and may not be the best structure for penny stock traders. It may be more useful to shop around for brokers who offer relatively low flat rates per trade regardless of how many shares are traded. The lower the flat rate, the less impact commissions and commissions have to pay on the final return. (For more information on this topic, see:
Opening Your First Brokerage Account.) Given the areas of concern mentioned above and the high risk associated with penny stocks, the case of penny stock brokers (and their role) is all the more interesting. It is very important to choose the right advisor for highly speculative investments like penny stocks. Investopedia has compiled a list of penny stock brokers that are regulated in the United States. The brokers are not listed in any particular order. This list is not exhaustive; There are many other regulated penny stock brokers.
Here is a list of the top US-penny regulated stock brokers:
ChoiceTrade
- : ChoiceTrade offers penny stock on the Over Bulletin Board (OTCBB) and the Pink Sheet market. It charges a flat fee of $ 7 per trade for trades involving up to 500,000 shares. For trading more than 500,000 shares, it charges a basic commission fee of $ 7 per transaction, plus 1% of the total dollar value of trading orders. ChoiceTrade is registered with the Securities and Exchange Commission (SEC) and is a member of the NYSE Arca, BATS Exchange, and the Securities Investor Protection Corporation. Charles Schwab Corp:
- Schwab offers penny stocks trading through its standard trading account. One can trade via the Bulletin Board Counter (OTCBB) and the Pink Sheet newspaper online via the Schwab website and mobile app. The penny stock brokerage fee is $ 8.95 per trade. Interactive Broker
- (IB): The Interactive Broker offers penny stock trading in selected stocks on the Pink Sheet and OTCBB through its standard equity trading account. It offers both a fixed-rate structure and a tiered structure. Fixed prices start at $ 0.005 per share for a minimum trade order of $ 100, while tiered starts at $ 0.005 per share for volumes over 100 million per month.<=”” strong=””>Scottrade offers penny stock trading at a flat base rate of $ 7 per trade, plus 0.5% of the trade principal. Scottrade offers research and screening tools, whose aim is to provide important information about penny stocks that can assist traders in making decisions for trading penny stocks. This includes real-time quotes, advanced stock scanners, market news, market commentary, and analyst reports. TDAmeritrade TDAmeritrade (AMTD
- AMTDTD Ameritrade Holding Corp49 73-0. 28% Made with Highstock 4.2.6
- ) received orders for penny stocks listed on the OTC Bulletin Board and Pink Sheet securities. These can be traded via the standard equity trading account offered by TDAmeritrade. A standard brokerage fee of $ 9.99 per trade applies to penny stocks. TradeKing: TradeKing offers trading in penny stocks through a standard equity trading account which charges $ 4.95 per trade. For penny stocks (which TradeKing defines as stocks priced less than $ 2.00 per share), TradeKing adds $ 0.01 per share across orders. The maximum commission per order is limited to 5% of the trade value. TradeKing requires a minimum investment of $ 100 per order in trading cent stock (listed on the OTCBB and Pink Sheet). Checklist for Choosing a Reliable Penny Stock Broker. Apart from the aforementioned list, penny stocks can also be purchased through one’s ordinary stockbroker. If you are exploring a new brokerage, there may be a few questions to ask and some important things to consider.
- Most brokers today offer online trading and mobile applications. Relying solely on traditional phone-based call-and-trade facilities can cause unwanted results in price fluctuations as you wait for the order taker to get on the line to place your order – which significantly affects your trading, as prices fluctuate every minute. . In addition, there may be telephone and trade charges for each call you make. Self-help online options – live screens with instant pricing and readily available info – always better than waiting on the phone, and not to mention that you don’t have to pay phone calls. Depot and
Nostro facilities
:
- A depot is your dematerialized account in which you keep your shares. A nostro account is your bank account where you keep money to buy and sell stocks. All stock brokers offer depots but a select few nostro offers. It is important to choose a stockbroker that offers Depot and Nostro facilities (either alone or with integration with banks and depositors).
Penny stock trading is a speculative game, where the price fluctuates by the minute. Instant and reliable money transfers are essential for efficient and timely trading. If your transfer of capital fails or is stuck through a lot of traffic jams, or if it takes time to clear your money from your account to your brokerage account, then your penny stock trading will suffer a lot. Brokers that offer both depot and nostro facilities (or unlimited integrations) are your best bet.
Charges, fees, and charges: An important part of trading stocks are transactional fees, which are increasingly important in the case of penny stocks as every penny price movement becomes important. Let’s take a simple example, you intend to buy penny stocks currently trading at the CMP (Current Market Price) for $ 0. 10 each. You expect this price to double to $ 0.20 for fast and high profits. However, if your brokerage commission structure is such that it effectively charges $ 0.05 on every purchase and sale of your trading leg, then all your profit opportunities are lost even if the share price is doubled. You’re already taking the risk of investing in high-risk stocks – as well as paying high fees that direct your profits to your broker. This was clearly an unwanted situation. It is important to be fully aware of what you will pay the broker for such a high-risk investment. Awareness of the following, especially with regard to trading penny stocks, is important when choosing a broker:
Transaction fees:
This is a common brokerage fee that is often listed on broker’s websites as “Broker> starting at $ x per trade” or “3% per trade order”. Attention should be paid to the additional terms and conditions mentioned, such as $ x may be an offer only for the first month’s promotion, or $ x only applies after you have made at least 20 trades per month; trades under which may have higher fees.
Minimum per share per share
cost: The stock of pennies you want to buy may have a current market price of just $ 0. 10. Purchasing 10,000 shares would ideally cost $ 1,000. However, a broker may have a “minimum brokerage per share basis”, which may (say) $ 0.03 per share you buy / sell. Hence, your total purchase price will increase significantly by 30% to $ 1,300. But this is not all. The same may apply to the sell side of your trade. Therefore, to profit from this trade, the price of your penny stock will have to go up significantly (several times) so that you can make a profit on this investment. For that “minimum brokerage fee”, most of the money goes to the broker, leaving little room for your profit.
- Brokerage minimum per order invoice: The broker may have a minimum fee based on a trade order, say a minimum of $ 10 per trade, against the 3% brokerage advertised per trade order value. If you buy 1000 shares at $ 0.01 each, your expected total purchase price might be $ 10 (1000 shares * $ 0. 10) plus 3% (of $ 10) = $ 10.30. since the “minimum brokerage fee per order” is $ 10, the actual purchase price is $ 10 + $ 10 = $ 20 (plus tax, etc.). Effectively, your purchase price is doubled due to this fee, and the same applies when selling the trade leg. The market price of your penny stock may need to more than quadruple, just to allow you to return the money you invested. Big Surcharge: Some brokers may also charge extra for large orders in the name of “Big Order Cost of Goods”. This fee may apply if you buy (say) more than 100,000 shares. Again, it’s a case of top-up fees that investors should know.
- Broker mandated trading frequency (such as minimum x trades per month): For the implementation of the lowest possible brokerage rate, a penny stock broker may charge a minimum trade per month, which may be charged a higher fee.
- Fees for maintaining a brokerage account : Penny stock trading accounts require an annual maintenance fee to be paid. In addition, there may be fees for deposit accounts, money transfers, etc., which may eat into your potential profits.
- Minimum deposit? Inactivity fees : Opening an account and waiting long-term for the right opportunity to buy low-priced penny stocks may incur significant costs. There may be a minimum deposit required (and must be maintained at all times). The broker can charge you without a transaction and your intermediary account has been inactive for a long period of time.
- Fees for withdrawals : The broker may charge a fee for any withdrawals you make to transfer money from your trading account.
- The aforementioned details provide some important points about what the price of a penny stock should be when choosing a broker. It’s best to ask for a written / printed billing schedule (and any additional conditions, top-up fees that apply) so you know all the details up front. A word of caution – most penny stock brokers strongly promote online account opening, offering deep discounts or cash back offers. However, opening an online account means ignoring the fine print conditions and additional fees. It is advisable to thoroughly read and understand every detail, call the helpline and ask for a written schedule to ensure your investment remains safe.
- Let’s move on to other points beyond transaction fees: Is short selling allowed?
- Although short selling may be bound by regulatory requirements, some brokers may prohibit short selling in penny stocks, as a risk management measure of their own. Those who allow short selling may require a higher amount of margin to maintain short positions. Due to the highly volatile pattern of penny stock prices along with high margin requirements, traders of penny stocks short selling should be prepared to make extra cash in a short amount of time. Website response time and hold time on the line:
The high volatility of the penny stock price in a short time affects both the selling and selling legs. Traders may not be able to enter or exit a position if the broker’s site or the hold time on the phone takes too long, so that the price changes significantly away from the desired level.
Functions and tools offered:
Do you need a variety of customer service? Special access to research tools and special reports on penny stocks? Flow data feed and technical indicators on it? Any features, even if listed on a promotional ad or website, may not be free and may incur high monthly (recurring monthly) costs. Be aware of the cost of special features and select only the features you need.
- Further considerations for foreign investors: Forex risks come into play
- Forex markup fees increase trading costs Trading with foreign brokers increases the risk, because in case of disputes, investors may have to approach foreign authorities for resolution, which may not be subtle and may turn out to be costly.
- Penny stock scams (and how to avoid pitfalls): Anything that appears to offer high returns at low fees has the potential for fraud. Some typical red flags every investor should know:
Heavy unofficial promotions via internet / email
- Promotion by telephone salesman is not open and fair marketing
- Claims about inside information leading to penny stocks become multi-bagger newsletters
- Online newsletters and forums are loaded with lots of “recommendations.”
Common pitfalls that penny investors should know about are:
Pump and Dump Schematic
- : The promoter claims access to “inside information” to inflate prices, but can in fact try to unload earlier. buy cheap lots with high returns. Investors who act on this tip may end up sitting down with high-cost investments.
- Short and Distort
- : Another pump and dump variant, working in the reverse direction. Short promoters sell penny stocks at high prices and then promote negative news about those stocks to lower prices and rank their positions for big profits.
- Long term average technique
: A cyclic scheme, in which investors are advised to continue to accumulate penny stocks with each price drop, with expected windfall gains once the stock price turns positive. Recommendations from brokers play a fundamental role in such a scheme.
- Narrowing down your potential trades Now that you know where to trade penny stocks, the next step is to determine what stocks to trade. One popular method is to use a stock screening tool, such as those found on the OTC Markets or Finviz websites. Screening for stocks under $ 5 is the easiest way to narrow down the trading universe. From here, you can further filter the list depending on your strategy and risk tolerance. For example, maybe you’re only interested in penny stocks doing business in the tech sector. In this case, you will make the necessary adjustments and then run the filter. (
- For more information on this topic, see: How Investors Can Screen Share Ideas )
- . If you are a beginner to using a stock scanner, check out:
Finviz. com Stock Screener: An Introduction
. Once you get the hang of it using Finviz’s stock screener, your list, based on the filters above, should look something like this: No. Company Ticker
Price Sector ($) 1
| ADAT | Authentidate Holding Corp. | Technology | 3. 78 | 2 |
| BLIN | BLINBridgeline Digital Inc2. 72 + 6. 21% | Made with Highstock 4. 2. 6 | Bridgeline Digital, Inc. | Technology |
| 0. 92 | 3 ETAK Elephant Talk Communications Corp. | Technology | 0. 17 | 4 |
| GIGM | GIGMGigaMedia Ltd3. 02-2. 26% | Made with Highstock 4. 2. 6 | GigaMedia Ltd. | Technology |
| 2. 44 | 5 GRVY GRVYGravity60. 30 + 0. 30% | Made with Highstock 4. 2. 6 | Gravity Co., Ltd. | Technology |
| 4. 10 | Note: Prices were taken on July 18, 2016. Understanding the Risks When it comes to trading penny stocks, it is important to understand the risks. In most cases, these companies are small stocks and vulnerable to major volatility. Whenever money is bet on trying to make a profit, there is a risk of great loss. This is especially the case when investing in penny stocks, so tread carefully. Since most institutional investors have rules governing the trading of penny stocks, they usually have no following in the investment community. Therefore, liquidity is a serious concern and should not be ignored. | How to Choose a Penny Stock Winner | Share Price and Valuation | One of the biggest mistakes retail investors make is that they perceive penny stocks to be affordable. There is a feeling that a person gets a better boost for their money when they buy thousands of shares than some companies with a higher share price. At first glance this thinking seems rational, however, a $ 1,000 investment in Company A that is trading at $ 0. 10 allows an investor to buy 10,000 shares instead of ten shares of Company B that are trading at $ 100. A key piece of information that is often overlooked is the number of shares outstanding. Suppose that Company A and Company B share the same basis with the exception of the number of shares outstanding. For convenience of example, let’s also assume the company has a market capitalization of $ 100 million. |
| Company name |
Stocks Outstanding
Stock price
Market Cap.
Company A
1, 000, 000
| $ 0. 10 | $ 100,000,000 | Company B | 1, 000, 000 |
| $ 100 | $ 100,000,000 | When stock price is the only factor being considered, a retail investor may think that the quality of a company’s trading at $ 100 is much higher than that of a company trading at $ 0. 10. As we have seen in the example, this may not always be the case because it is identical, So it is important to consider the number of shares available. (For a better understanding of this topic, see: | Basics of Payable and Floating Shares |
| Beware of Dilution | Another factor to be aware of when trading penny stocks is dilution. The number of shares outstanding can often be released from control through the use of tools such as employee stock options, issuance of shares to raise capital and stock splits. If a company issues shares to raise capital, which many small companies have to do, then the company often dilutes the percentage of ownership held by other investors. For example, if Company A spends 110,000,000 to raise capital then it is only natural that the share price will fall to $ 0.09 ($ 09 keeps the market cap stable at $ 100 million). In this case, the underlying business hasn’t changed, but the number of shares has, which causes the share price to fall. | When trading penny stocks, it is important to find companies that hold firm holdings of their stock structure because consistent dilutions erode the value of shares held by existing owners. (For further reading, read: |
The Danger of Stock Dilution. How to Place a Winner
Most companies that trade on a share price below a dollar have a relatively small market capitalization, but as shown Above, this is not always the case. When it comes to investment, it is important to consider the fundamental strength of the company. Does the management team rely on issuing new shares to raise capital? Is the company profitable or will it be able to generate profits based on its current business structure? Can the company compete in its sector? For those willing to do their homework there are gems to be found that meet these criteria. (For more, see:
Penny Shares Explained
.) As you can see from the General Growth Properties, Inc. monthly chart (GGP GGPGGP Inc19, 10-2, 90% <Made with the main stock of 4.2.6
), the company’s stock price was pegged into the penny price range during the 2008 financial crisis. For those who didn’t follow the company, GGP owns, manages, leases and redevelops real estate like a regional mall in US Investors that oversees the stock structure, its underlying fundamentals, and the competition could identify GGP as a prime candidate and benefit from the tremendous rise in the following years. On August 15, 2016, GGP is trading at a price of $ 30.04.
Another key factor to consider is that certain sectors are more common in finding stocks trading under a dollar. For example, the metals and mining sectors are well known for the number of companies that trade in pennies. Given the reliance on issuing new shares to raise capital to fund operations, increasing competition and aggressive incentive plans, it is imperative that investors pay attention to the factors mentioned above in order to be successful. Potential Penny Stock Payoffs Although risky, penny stocks have a potential yield in the form of volatility. Usually, volatility is viewed negatively. But in the realm of penny stocks, many investors expect to benefit from sudden and large price spikes. While it’s rare to find a company that can make the successful jump from cents to power supply, when it does, investors reap the benefits in spades. Amounts vary widely in the penny stock world, but investors have been known to make over 1,000% returns over a period of a few weeks. The secret to success in this case, of course, is to be diligent in doing research to find the right provision. (
Further, see: Penny Stocks Explained. Core
Investing in penny stocks can be precarious, and not for everyone. If you feel you understand the risks and are ready to move on, then the first step is to find a broker, fund an account and then search for suitable trading candidates. Stock filters are probably your best bet in narrowing down the stock world so you can find one that fits your trading style and tolerance. your risk. If you want to improve your trading skills, Investopedia has online trading courses.