Penny Stock Brokers 4u

In order to buy and sell penny stock, an investor first needs to understand what they are and how they work. As for the definition, there are really different considerations involved. Some feel that only stocks priced at under $1 a share can be called a penny stock, while others take that amount to $3 or even $5 per share. Additionally, some consider that they still are not considered penny stocks if they are listed on a major stock exchange such as the NYSE or NASDAQ even if they have a low price. More involved definitions do not even look at the actual price but instead consider the market capitalization of the company and to be a penny stock that must be under a specific amount, which also depends on who is describing the stock. And to even further complicate matters, even the term ‘penny stock’ is not used by everyone; instead they prefer titles such as micro-cap, nano-cap or penny shares.

Whatever name they go by, or how they are defined, the one thing that most people agree upon is that they are quite a bit riskier than blue chip stocks. While there is no limit to the number of claims out there that you can become a millionaire quite easily by investing in penny stock, the truth is that there are four things that make this type of investment far less than the sure thing they would have you believe.

First of all, penny stocks are not very liquid. There is less likelihood of there being a willing buyer for your shares when you are ready to sell them than there is with other investments. Additionally, it is far too easy for unscrupulous practices such as a ‘pump and dump’ by which traders manipulate the stock price and then cash out quickly. This will leave some unfortunate investor at the end with the ‘hot potato’ that is now often worthless.

Secondly, it can be near impossible to obtain historical information about a company offering such shares for sale.  Most times the company is either brand new or facing bankruptcy, and it may not be easy to figure out just which one is the case.  While there are brokers that will tempt investors into the penny stock world by claims that today’s big companies started out as penny stock and the wise investor now is very wealthy, the truth is that very few companies really start out that low. In fact, most of them actually name Microsoft and Wal-Mart as having begun this way and that is a complete fallacy as both sold their first shares well above any of the generally accepted definitions of penny stock.

Third, you can be pretty sure that a penny stock that is not listed on one of the major exchanges is not there because they do not meet the minimum requirements to do so. Even the OTCBB requires companies to file certain documents with the SEC. However, those listed on the pink sheets have no requirements of this nature.  Of particular concern is those that manage to be on the major exchanges yet become delisted later.

Lastly, getting even basic information about these companies to be able to make an informed decision can be hit or miss. You may not even be able to confirm that the company is legitimate because you cannot locate a physical address for them. Obviously, this kind of scenario sends a wise investor in a different direction entirely since it is quite likely a scam.

So, assuming you have considered the potential problems with investing in penny stocks and have decided to invest in some just to give it a shot, let’s hope you are doing so with only that portion of your portfolio that you can comfortably afford to lose.  The next step is determining which type of stock broker you want to use. You can use either a full-service broker or a discount broker, although it is important to note that not all full-service brokers will handle a penny stock transaction and those that do often have extra fees involved in doing so. Even some discount brokers have surcharges for low price stocks and/or large share quantity transactions. While your current portfolio may already be with a broker, you may have to move the portion you are going to invest in penny stocks to another brokerage.

When deciding on a broker for your penny stock transactions, review each for their commission structure, fees and minimums. If using an online account, be sure the website is suitable for your needs – is easy to use and has the tools you want.  Find out if their quotes are delayed or real time and how quickly they process transactions. Also determine the reliability of the website – such as if it goes down for maintenance regularly at a time that would be inconvenient to your schedule.  From time to time, online brokers have special offers for new accounts such as a free trial period that can be useful if you want to check out more than one at a time.

Once you have settled on a broker and set up the account, it is time to decide on what penny stocks to put into your portfolio. Because tracking penny stocks can be time consuming, it is a good idea to limit your diversification to just three to begin with. Another option is to invest in a penny stock mutual fund thus putting the work and decisions into someone else’s hands.  You may also want to sign up for some of the newsletters that are compiled by people that only watch penny stocks. It is never a bad thing to get advice from those that spend a lot more time reviewing what is available; just be sure they are reputable and have a good track record before you follow their advice unquestionably. You can learn from them by watching what has worked for them historically even if you still find stocks for your portfolio on your own.