Before you can trade stocks, you will need a broker. The money you deposit with your broker can be used to buy and sell shares.
Today, we will discuss to you what are the best way to choose the right penny stock broker for you. We will also show you the characteristics of penny stock brokers you should avoid.
Choosing the right penny stock broker is as important as choosing the right stocks. However, before we begin our discussion about penny stock brokers, let’s have a recap about what is a penny stock.
What is Penny Stock?
A penny stock is the trades happening outside the major market exchanges at a relatively low price and has a small market capitalization.
The word penny stock has evolved around the market. Before, penny stocks were stocks that are traded for less than a dollar per share. However, the Securities and Exchange Commission has modified the meaning to include all shares trading under $5.
Most penny stocks do not trade on the major market exchanges. But there are some large companies, based on market capitalization, that trade under $5 per share on the main exchanges such as Nasdaq.
Moreover, penny stocks are much suitable for investors who have a high tolerance of risk. Usually, penny stocks have a higher level of volatility, which can result into a higher potential reward and a higher level of risk.
Considering the high level of risk that comes with investing in penny stocks, investors like you should take particular precautions. Always remember that before entering the trade, you should have a stop-loss order predetermined. You should know where to exit if the market moves opposite of the intended direction.
It is important to have realistic expectation, even though penny stocks can have explosive moves. The gains in the stock market usually take months and even years to materialize. Therefore, if you are planning to turn $100 into $50,000 in just a week, you are likely to be disappointed.
Learn about: Short Selling Penny Stocks: Should You Do It?
What are Penny Stock Brokers?
Before you can trade in penny stocks, you must look for the right broker that fits your strategy. Take note that in choosing a broker, there is no one size fits all. It is a process and it often requires lots of tedious research and time.
A penny stocks broker is an individual who engage in the buying and selling of penny stocks.
The main purpose of penny stock brokers is to provide a means to facilitate the process of trading stocks.
Penny stock brokers can also act as your advisor in certain situations. Your chosen broker can have an impact on your trading decisions.
Moreover, penny stock brokers can offer two ways of trading. They can either have traders call in to place their buy and sell orders with a live broker or they can use the online trading platform of the broker.
Most of the brokers today are now providing an online trading platform, which most traders have become familiarize with.
In choosing a penny stocks broker, choose a broker that offers flat-fee trade commissions without any tricks. Using a broker that does not provide a flat-fee trade can be expensive in a long run.
Usually, these brokers charge a base rate with an additional fee per share, which is not good since penny stocks are low priced.
Most of the brokers have max costs limits however are still more expensive than simply paying one fee.
What You Should Look for in a Penny Stock Broker
In order for you to find the right penny stock broker, you need to look for these characteristics. You have to see these characteristics on a broker to know that he or she is the right broker for you.
No Costly Add-Ons
Investing in penny stock is inherently aggressive, which is why some brokers demand a trader to upgrade to a premium trading account, which has higher minimum balances or additional platform fees.
Most penny stock brokers will offer various tools that traders may need. However, not all brokers will offer these for free. There are certain brokers who charge additional fees for trading platforms.
Meanwhile, other brokers require a trader to place orders through telephone to a human broker. This move can add more than $25 in service charges.
This may not be a big deal for some traders who have bigger accounts since they are more focused on making the most of their capital. But if you have a smaller account, the last thing you need to do is incur additional fees.
Remember that you can always trade penny stocks without these additional costs and charges. So before you choose a broker, you have to make sure that you are clear on any additional fees that you may incur.
No Hidden Fees
The last thing you want to happen to you is to be scrapped by hidden fees. If you are actively trading large amounts of stocks, there will be times that the margins you are getting on your returns are small. That is why you should avoid hidden fees because hidden fees can easily cut into that.
Low Account Minimum
Find a broker that will allow you to start with a lower balance. Typically, investors who want to start investing in penny stocks do not have a large amount of liquid capital. This is why it is important to look for a broker with a lower account minimum balance requirement like E-Trade and TD Ameritrade.
You have to do whatever you can to drive down costs. If a broker can find you volume discounts and you have a plan on having a big volume of trades, it may make sense to go with that broker.
No Surcharges for Low-Priced Stocks
There are discount brokerages advertise their standard transaction fees in marketing. However, they forget to tell you that there can be an additional cost to low-priced securities. Some also charge a percentage on the total trade value and others charge a fee per share.
Either way, as an investor you are getting charged more than you would for a regular blue chip stock, such as Apple Inc. and Walmart.
Excellent Research Platforms
Penny stocks are not always reported or shown in the media. It is also often subject to fraudulent marketing scheme known as “pump and dump.”
In order for you to effectively pick up stocks, you have to choose a broker that has reliable and quality research reports.
What You Should Avoid in a Penny Stock Broker
If you are set on this strategy, you should enter penny stock trading with your eyes open. When you are looking for a penny stock broker you should look out and avoid these characteristics.
Avoid firms that require you to trade penny stocks by placing a phone order. Also avoid firms that impose limits on the types of trades you can execute. Ideally, your chosen penny stock broker will allow you to trade penny stocks with the same online platform used for other stock trades.
The best penny stock brokers allow trades of unlimited shares without any additional fees. However, there are some brokers who charge more for large orders. There are also some brokers who limit the number of penny stock shares you can trade in one day. This can actually slow your ability to trade and you’ll be forced to pay another commission for a second order.
There are brokers who often add a surcharge to stocks that are valued at less than a certain dollar amount. However, that threshold will vary by broker. There are some who consider anything trading under $5 to be a penny stock. But there are some who put the cutoff at $3 or $1. Since penny stock trades typically involve a large number of shares, it’s usually best to avoid brokers with a surcharge. Instead look for a broker that charges a flat commission.
Choosing a broker might seem easy, but the truth is it is not. You have to make sure that the broker you choose has the ability to help you become the best trader.
It actually takes time and effort. To really get the right broker that can help you in the field, you should do your own research.
Learn about what are the characteristics you should look in a penny stock broker. Also, look out for the characteristics you should be avoiding in a broker – specifically penny stock brokers.
Choosing the right broker takes time and critical thinking. You should know what the characteristics you should look and avoid. It might take long, but in the end it will be worth it.
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