When I first starting investing in the stock market, one of the first questions I asked was ‘where can I buy penny stocks’. For some reason, I was under the erroneous belief that this was where the crazy profits were. After all, didn’t Wal-Mart, Home Depot, and MicroSoft start out as penny stocks?
What is a Penny Stock
The phrase penny stock has had a number of different meanings over the past few years. A number of years ago, penny stocks were essentially any stock that traded for less than $1 per share on the open market. According to current guidance, provided by the SEC, penny stocks should be defined as those stocks that trade for less than $5 per share.
Regardless of the definition you elect to use, penny stocks are typically cash-strapped smaller companies that may or may not have stable earnings. These companies often represent a much larger risk and generally trade primarily on the OTCBB and Pink Sheets. Low trading volume and limited access to audited financial records make penny stocks much more susceptible to share price manipulation than those stocks traded on the larger stock markets such as the New York Stock Exchange or the NASDAQ.
Penny Stock Brokers
If you plan on trading penny stocks you will, of course, need a penny stock broker to handle the transactions for you. In addition to evaluating the broker’s commission, you need to be aware of a few rules that must be followed before you can start buying and selling penny stocks.
According to rule 15G, the US Securities and Exchange Commission (SEC) requires that the broker-dealer provide to the customer certain documentation that describes the risks typically associated with buying penny stocks. Before the customer can start trading these securities, the broker must receive, in writing, your signature indicating that you have received the appropriate documentation and that you understand the risks of trading penny stocks.
Furthermore, the SEC requires that the broker not allow the investor to invest in penny stocks for 2 days in order to allow them to fully evaluate and consider any potential trades more thoroughly.
Where to Buy Penny Stocks
Personally, I would not touch penny stocks with a ten foot pole. I prefer selling covered calls and other more traditional investment strategies. With that being said you can generally buy penny stocks from the following nationally recognized stock brokers:
TradeKing
TradeKing is an online stock broker that specializes in option trading strategies and investor education. They offer easy to understand tools and a flat commission price on traditional stock orders. Many investors like the fact that there is no minimum amount required to open an account and their customer support is consistently rated among the best with respect to overall customer satisfaction.
It should be noted, that many online brokers charge an additional fee for each penny stock traded. I believe it is $0.01 currently at TradeKing.
- Commission Price per transaction $4.95
- Amazing online community included an informational forum moderated by investment professionals
- Open a TradeKing account
Penny Stock Risks
As previously mentioned, penny stocks typically have a much lower trading volume. In fact, many of these stocks do not trade on a regular basis. As such, it may prove to be rather difficult to sell your shares when you want and for the price you need. Additionally, the underlying financial statements of these companies have not been evaluated by the SEC. In fact, audited financial statements are generally not even required for companies that trade on the Pink Sheets.
Finally, when it comes to buying penny stocks an investor needs to realize that their broker, whether online or not, is not an impartial adviser. They make their living off the commissions generated from buy and sell transactions. Always seek the advice of someone you trust completely before investing your hard-earned money. Penny stocks investors should, in fact, be comfortable with the fact that they may lose their entire investment.