Investing In The Stock Market

Penny stocks are a very popular form of investment for many people.  The high percentage change experienced by penny stocks makes them attractive to traders looking to make high returns.  As defined by the SEC, penny stocks are those that trade for less than $5 per share.  Now, others may use other cut offs, but that is the official definition.  As you might expect, these penny stocks belong to very small companies, and trade in very small volumes.  Often times, this low volume leads to a lack of liquidity, which basically means you can’t buy and sell these stocks when you want to, or at least not at the price you might like.  The small trading volume also makes penny stocks prone to manipulation by unscrupulous individuals.  Despite all of the caveats, though, people still do make money with penny stocks.

If you’re looking to start investing with penny stocks, you will need to find a broker.  This might seem easy, but not all brokers are good for buying penny stocks.  The reason for this is that many brokers will impose high fees for trading penny stocks.  Since one of the keys to investing is to keep fees as low as possible, you will want to find a broker that does not have any fees for penny stocks.  This is easier said than done, but is important if you want to save money on your trades.

If you have a broker that doesn’t charge fees, than buying penny stocks is just like buying any other sort of stock.  Just be careful, the world of penny stocks in unforgiving for those who think they have things all figured out.  Take your time, do your research, and don’t get greedy.  Fail to do this, and you will lose money.

Penny stock trading is a popular form of trying to make money with stocks.  Since penny stocks are priced very low, small movement in their prices can lead to great changes in the total value of a position.  For this reason, they are popular with day traders, since volatility is needed to make a good short term profit.

As with any sort of intra-day trading, it is very important to keep costs low.  If you are entering and exiting multiple positions in a short amount of time, it is crucial that you spend no more than necessary on commissions, as you will be shocked at how fast these can all add up.  Keep more of your money to yourself, and select a penny stock broker with the lowest commissions possible.

Another potential issue when it comes to fees is that many brokers will charge a premium for trading stocks under a certain cost per share, or at a certain volume.  Since penny stock trading consists of buying a high volume of very cheap stocks, this can form a problem.  Be sure to find a broker that does not charge a premium for trading penny stocks if at all possible.  You may have to read the fine print to figure this out, but it’s worth it in the long run.  Those small fees will eat into your earnings over time.

photo credit: ♦ Kris ♦

Once you have the fees sorted out, it’s time to consider some other factors.  As with any sort of day trading, speed of execution is critical.  You want your orders to be carried out as soon as possible after you place them.  The best way of figuring out the responsiveness of a given broker is by reading reviews online about how well they execute your orders.  Most of them will advertise good times, but there are no guarantees.  This is one area where doing your homework will pay off well.  You don’t want to be stuck holding a bad position longer than you want to because the broker didn’t execute your order quickly.

So, this covers the very basics of choosing a penny stock broker.  There are other features that help differentiate different brokers, but the ones listed above are by far the most critical.  If you’re going to be trading penny stocks, you can’t afford to ignore these issues and let costs eat up your earnings.  Play it safe, do your homework, and find the right brokerage for you.