How To Select a Penny Stock Broker
Stock brokers play a fundamental role in the trading
business. They provide the necessary trading infrastructure
and can significantly influence the preferences, behavior and
trading patterns of investors.
When looking for a penny stock broker, one aspect to pay
particular attention to is their fee structure. Some brokers charge
commissions on a per-share basis. This structure is usually set
at a particular rate for the first specified number of shares, and then
another rate for each additional share. This structure is better suited
for investors who are buying a relatively small number of shares and
may not be the best structure for penny stock traders. It may prove
more useful to shop around for a broker that offers a relatively low flat
rate per trade regardless of how many shares are traded. The lower the
flat rate, the smaller the impact that fees and commissions have on the
final return. (For more on this topic, see: Opening Your First Brokerage
Account.) Considering the above-mentioned concern areas and high risks
associated with penny stocks, the case of penny stock brokers (and their
roles) becomes more interesting. It's crucial to select the right advisor for
highly speculative investments like penny stocks.
Investopedia has compiled a list of regulated penny stock brokers in the
United States. Brokers are listed in no particular order. This list is not
exhaustive; there are many other regulated penny stock brokers.
Here is a list of top U.S.-regulated penny stock brokerages:
ChoiceTrade: ChoiceTrade offers penny stocks on the Over the Counter
Bulletin Board (OTCBB) and Pink Sheet markets. It charges a flat fee
of $7 per trade for trades involving up to 500,000 shares. For trades over
500,000 shares, it charges a base commission fee of $7 per trade, plus
1% of the total dollar value of the trade order. ChoiceTrade is registered
with the Securities and Exchange Commission (SEC) and is a member
of NYSE Arca, the BATS Exchange, and the Securities Investor Protection
Corporation.
Charles Schwab Corp: Schwab offers penny stocks trading through its
standard stock trading accounts. One can trade Over the Counter Bulletin
Board (OTCBB) and Pink Sheet securities online through the Schwab
website and mobile app. The penny stock brokerage charges are $8.95
per trade.
Interactive Brokers (IB): Interactive Brokers offers penny stock trading
in selected stocks on the Pink Sheet and OTCBB through its standard
equity trading account. It offers a fixed-rate structure and tiered structure.
Fixed pricing starts from $0.005 per share for a minimum $100 trade order,
while tiered starts from $0.005 per share for more than 100 million volume
per month.
Scottrade: Scottrade offers penny stocks trading at a flat base rate of
$7 per trade, plus 0.5% of the trade principal. Scottrade offers research
and screening tools, which aim to provide vital information on penny
stocks that can assist a trader in decision-making for penny stock trades.
These include real-time quotes, advanced stock screeners, market news,
market commentary, and analyst reports.
TDAmeritrade: TDAmeritrade (AMTD) accepts orders for penny stocks
listed on OTC Bulletin Board and Pink Sheet securities. These can be
traded through the standard equity trading accounts offered by
TDAmeritrade. The standard brokerage charges of $9.99 per trade
apply to penny stocks.
TradeKing: TradeKing offers penny stock trading through its 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 on the entire order. Its maximum
commission per order is limited to 5% of the trade value. TradeKing
requires a minimum investment of $100 per order in penny stocks
trading (listed on OTCBB and Pink Sheet).
The Checklist to Select a Reliable Penny Stock Broker
Beyond the list mentioned above, shares of penny stocks can also
sometimes be purchased through an individual’s regular stockbroker.
If you are exploring a new brokerage, though, here are some questions
to ask and some key points to consider.
Does it have an online (and mobile) trading platform or is it
simply call-and-trade?
Most brokers today offer online trading and mobile apps. Relying
only on the traditional phone based call-and-trade facility can lead
to undesirable results in price fluctuations while you're waiting for
an order taker to get on the line to place your order—significantly
impacting your trades, as prices fluctuate each minute. Additionally,
there may be call-and-trade charges for each call you make. Self-help
online options—a live screen with instant pricing and info available—are
always better than waiting on the phone, not to mention that you won't
have to pay for the cost of a phone call.
Depot and Nostro facility: A depot (depository) is your demat
(dematerialized) account where you keep your shares. A nostro
account is your bank account where you keep your money for buying
and selling shares. All stock brokers offer depot but a select few offer
nostro. It is important to choose a stockbroker offering both Depot and
Nostro facilities (either on its own or with seamless integration with banks
and depositories).
Penny stock trading is a speculative game, where prices fluctuate
each minute. Instant and reliable money transfers are essential for
efficient and timely trading. If your capital transfers fail or get stuck
through the multiple bottlenecks, or if it takes time to clear your
money from your account to your broker's account, then your penny
stock trading will suffer greatly. A broker offering both depot and nostro
facility (or seamless integration across) is the best bet.
Charges, charges, and more charges: One important part of any
stock trading is transactional costs, which gains further importance
in the case of penny stocks since each penny price move matters.
Let’s take a simple example you intend to buy a penny stock
currently trading at the CMP (Current Market Price) of $0.10 each.
You expect the price of this to double to $0.20 for quick and high
gain. However, if your broker’s commission structure is such that it
effectively charges you $0.05 on each buy and sell leg of your trade,
then all your profit opportunity is lost even though the stock price is
doubling. You are already taking a risk on investing in high-risk penny
stocks — additionally paying the high charges that direct your profits
to your broker. This is clearly an undesirable situation. It is important
to be fully aware of what you will pay to the broker for such high-risk
investments.
Awareness of the following points, especially with regard to penny
stock trading, is important when choosing a broker:
Transaction charges: This is the general brokerage charge often
listed on brokers’ websites as “Brokerage starting from $x per
trade” or “3% per trade order”. Attention should be paid to any
additional terms and conditions mentioned, like $x may be a
promotional first month only offer, or $x may be applicable only
after you make at least 20 trades per month; trading below that
may have much higher charges.
Minimum brokerage per share charges: The penny stock you
intend to purchase may have a current market price of $0.10 only.
Purchasing 10,000 shares should ideally cost you $1,000. However,
the broker may have “minimum brokerage on a per share basis”,
which may be (say) $0.03 per share you buy/sell. Hence, your total
buy price will shoot up significantly by 30% to $1,300. But this is not
all. The same may apply to the sell-side leg of your trade. Hence, to
profit from this trade, your penny stock price will have to shoot up
significantly (multiple-folds) to enable you to profit from this investment.
For such “minimum brokerage per share charges”, the majority of the
money is going towards the brokerage, leaving little room for your profit.
Minimum brokerage per order charges: Brokers may have a
minimum charge per trade order basis, say a minimum of $10 per
trade, against the advertised 3% brokerage per trade order value. If
you purchase 1000 shares of a penny stock costing $0.01 each,
the total buy price you expect may be $10 (1000 shares * $0.10)
plus 3% (of $10) = $10.30. However, due to the “minimum brokerage
per order charges” of $10, the actual buy price will be $10 + $10 = $20
(plus tax, etc.). Effectively, your buy price is doubling because of these
charges, and same would apply during the sell leg of the trade. Your
penny stock market price may need to more than quadruple, just to
enable you to recover your invested money.
Large Order Surcharges: A few brokers may also have additional
charges towards large quantity orders in the name of “Large Order
Surcharges”. These charges may apply if you purchase (say) more
than 100,000 shares. Again, a case of top-up charges which investors
should be aware of.The frequency of trading mandated by the broker
(like minimum x trades per month): For the advertised lowest possible
brokerage rates applicability, penny stock brokers may impose minimum
trades per month, failing which higher charges may apply.
The cost of maintaining a brokerage account: A penny stock
trading account requires an annual maintenance fee to be paid.
Additionally, there may be charges for depository accounts, money
transfers, etc., which may eat into your potential profits.
Minimum deposit? Inactivity fee?: Just opening an account and waiting
long term for the right opportunity to buy the right low-cost penny stock
may come at a significant cost. There may be a minimum deposit
needed (and to be maintained at all times). The broker may charge
you for no trading and for your brokerage account inactive over a long
period of time.Charges towards withdrawal: The broker may levy charges
for each withdrawal you make to transfer money from your trading account.
The above-mentioned details provide a few important points about what a
penny stock trader should be aware of while selecting a broker. It's best to
request a written/printed schedule of charges (and any additional conditions,
top-up charges applicable) so that you are aware of all details up front.
A word of caution—most penny stock brokers heavily promote
online account opening, offering big discounts or cash-back offers.
However, online account opening will mean ignoring the conditions
in fine prints and additional charges. It is advisable to thoroughly
read and understand each detail, call up the helpline and ask for a
written schedule of charges to keep your investments safe.
Let’s continue with other points beyond transactional charges:
Is short selling allowed? Although short selling may be bound by
regulatory requirements, a few brokers may disallow short selling
in penny stocks, as a risk management measure at their own.
Those allowing short selling may need higher margin amounts to
be maintained for the short positions. Due to the highly volatile price
patterns of penny stocks along with high margin requirements, traders
short selling penny stocks should be prepared to provide additional
margin money at short notice.
The response time of the website and hold time on the phone: the high
volatility in prices of penny stocks within a short period has an effect on
both the buying and selling legs. A trader may not be able to get in or
out of a position if the broker’s site or the hold time on the phone takes
too long, leading to prices changing significantly away from the desired
levels.
Offered functionality and tools: Do you need a broad range
of customer services? Special access to dedicated research
tools and reports on penny stocks? Streaming data feeds and
technical indicators on top of them? Any such features, although
listed on promotional ads or websites, may not be free and may
come at high (recurring monthly) costs. Be aware of the costs of
special features and choose only features that you need.
Further considerations for foreign investors:
Forex risk comes into play
Forex markup fees increase the cost of trading
Trading with foreign brokers increases the risk, as in the case
of disputes the investors may have to approach the foreign
authorities for a resolution, which may not be smooth and may
turn out costly.
Penny stock scams (and how to avoid the pitfalls):
Anything that appears to offer high returns with low costs has
as fraud potential. Certain typical red flags each investor should
be aware of:
Heavy unofficial promotions through internet/emails
Promotions through brokers' boiler room telemarketing calls instead of
open and fair marketingClaims about insider information leading to a
penny stock being the multi-baggerVaguely labeled newsletter and
online forums filled with lots of “recommendations.”
Common traps that penny stock investors should be aware of are:
Pump and Dump schemes: Promoters claiming access to “insider
information” to inflate the prices, but in reality may be attempting to
offload the earlier purchased low-cost lot at high profits. The investors
who act on these tips may end up sitting with high-cost investments.
Short and Distort: Another variant of pump and dump, working in the
reverse direction. Promoters short sell the penny stock at a high price
and then promote negative news about the stock to lower the price and s
quare off their positions for a big profit.
Long-term averaging techniques: A cyclic scheme, where investors are
advised to keep on accumulating a penny stock with each price dip, with
assurances of windfall profits once the stock prices take a positive turn.
Recommendations from brokers play a fundamental role in such schemes.
Stock brokers play a fundamental role in the trading
business. They provide the necessary trading infrastructure
and can significantly influence the preferences, behavior and
trading patterns of investors.
When looking for a penny stock broker, one aspect to pay
particular attention to is their fee structure. Some brokers charge
commissions on a per-share basis. This structure is usually set
at a particular rate for the first specified number of shares, and then
another rate for each additional share. This structure is better suited
for investors who are buying a relatively small number of shares and
may not be the best structure for penny stock traders. It may prove
more useful to shop around for a broker that offers a relatively low flat
rate per trade regardless of how many shares are traded. The lower the
flat rate, the smaller the impact that fees and commissions have on the
final return. (For more on this topic, see: Opening Your First Brokerage
Account.) Considering the above-mentioned concern areas and high risks
associated with penny stocks, the case of penny stock brokers (and their
roles) becomes more interesting. It's crucial to select the right advisor for
highly speculative investments like penny stocks.
Investopedia has compiled a list of regulated penny stock brokers in the
United States. Brokers are listed in no particular order. This list is not
exhaustive; there are many other regulated penny stock brokers.
Here is a list of top U.S.-regulated penny stock brokerages:
ChoiceTrade: ChoiceTrade offers penny stocks on the Over the Counter
Bulletin Board (OTCBB) and Pink Sheet markets. It charges a flat fee
of $7 per trade for trades involving up to 500,000 shares. For trades over
500,000 shares, it charges a base commission fee of $7 per trade, plus
1% of the total dollar value of the trade order. ChoiceTrade is registered
with the Securities and Exchange Commission (SEC) and is a member
of NYSE Arca, the BATS Exchange, and the Securities Investor Protection
Corporation.
Charles Schwab Corp: Schwab offers penny stocks trading through its
standard stock trading accounts. One can trade Over the Counter Bulletin
Board (OTCBB) and Pink Sheet securities online through the Schwab
website and mobile app. The penny stock brokerage charges are $8.95
per trade.
Interactive Brokers (IB): Interactive Brokers offers penny stock trading
in selected stocks on the Pink Sheet and OTCBB through its standard
equity trading account. It offers a fixed-rate structure and tiered structure.
Fixed pricing starts from $0.005 per share for a minimum $100 trade order,
while tiered starts from $0.005 per share for more than 100 million volume
per month.
Scottrade: Scottrade offers penny stocks trading at a flat base rate of
$7 per trade, plus 0.5% of the trade principal. Scottrade offers research
and screening tools, which aim to provide vital information on penny
stocks that can assist a trader in decision-making for penny stock trades.
These include real-time quotes, advanced stock screeners, market news,
market commentary, and analyst reports.
TDAmeritrade: TDAmeritrade (AMTD) accepts orders for penny stocks
listed on OTC Bulletin Board and Pink Sheet securities. These can be
traded through the standard equity trading accounts offered by
TDAmeritrade. The standard brokerage charges of $9.99 per trade
apply to penny stocks.
TradeKing: TradeKing offers penny stock trading through its 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 on the entire order. Its maximum
commission per order is limited to 5% of the trade value. TradeKing
requires a minimum investment of $100 per order in penny stocks
trading (listed on OTCBB and Pink Sheet).
The Checklist to Select a Reliable Penny Stock Broker
Beyond the list mentioned above, shares of penny stocks can also
sometimes be purchased through an individual’s regular stockbroker.
If you are exploring a new brokerage, though, here are some questions
to ask and some key points to consider.
Does it have an online (and mobile) trading platform or is it
simply call-and-trade?
Most brokers today offer online trading and mobile apps. Relying
only on the traditional phone based call-and-trade facility can lead
to undesirable results in price fluctuations while you're waiting for
an order taker to get on the line to place your order—significantly
impacting your trades, as prices fluctuate each minute. Additionally,
there may be call-and-trade charges for each call you make. Self-help
online options—a live screen with instant pricing and info available—are
always better than waiting on the phone, not to mention that you won't
have to pay for the cost of a phone call.
Depot and Nostro facility: A depot (depository) is your demat
(dematerialized) account where you keep your shares. A nostro
account is your bank account where you keep your money for buying
and selling shares. All stock brokers offer depot but a select few offer
nostro. It is important to choose a stockbroker offering both Depot and
Nostro facilities (either on its own or with seamless integration with banks
and depositories).
Penny stock trading is a speculative game, where prices fluctuate
each minute. Instant and reliable money transfers are essential for
efficient and timely trading. If your capital transfers fail or get stuck
through the multiple bottlenecks, or if it takes time to clear your
money from your account to your broker's account, then your penny
stock trading will suffer greatly. A broker offering both depot and nostro
facility (or seamless integration across) is the best bet.
Charges, charges, and more charges: One important part of any
stock trading is transactional costs, which gains further importance
in the case of penny stocks since each penny price move matters.
Let’s take a simple example you intend to buy a penny stock
currently trading at the CMP (Current Market Price) of $0.10 each.
You expect the price of this to double to $0.20 for quick and high
gain. However, if your broker’s commission structure is such that it
effectively charges you $0.05 on each buy and sell leg of your trade,
then all your profit opportunity is lost even though the stock price is
doubling. You are already taking a risk on investing in high-risk penny
stocks — additionally paying the high charges that direct your profits
to your broker. This is clearly an undesirable situation. It is important
to be fully aware of what you will pay to the broker for such high-risk
investments.
Awareness of the following points, especially with regard to penny
stock trading, is important when choosing a broker:
Transaction charges: This is the general brokerage charge often
listed on brokers’ websites as “Brokerage starting from $x per
trade” or “3% per trade order”. Attention should be paid to any
additional terms and conditions mentioned, like $x may be a
promotional first month only offer, or $x may be applicable only
after you make at least 20 trades per month; trading below that
may have much higher charges.
Minimum brokerage per share charges: The penny stock you
intend to purchase may have a current market price of $0.10 only.
Purchasing 10,000 shares should ideally cost you $1,000. However,
the broker may have “minimum brokerage on a per share basis”,
which may be (say) $0.03 per share you buy/sell. Hence, your total
buy price will shoot up significantly by 30% to $1,300. But this is not
all. The same may apply to the sell-side leg of your trade. Hence, to
profit from this trade, your penny stock price will have to shoot up
significantly (multiple-folds) to enable you to profit from this investment.
For such “minimum brokerage per share charges”, the majority of the
money is going towards the brokerage, leaving little room for your profit.
Minimum brokerage per order charges: Brokers may have a
minimum charge per trade order basis, say a minimum of $10 per
trade, against the advertised 3% brokerage per trade order value. If
you purchase 1000 shares of a penny stock costing $0.01 each,
the total buy price you expect may be $10 (1000 shares * $0.10)
plus 3% (of $10) = $10.30. However, due to the “minimum brokerage
per order charges” of $10, the actual buy price will be $10 + $10 = $20
(plus tax, etc.). Effectively, your buy price is doubling because of these
charges, and same would apply during the sell leg of the trade. Your
penny stock market price may need to more than quadruple, just to
enable you to recover your invested money.
Large Order Surcharges: A few brokers may also have additional
charges towards large quantity orders in the name of “Large Order
Surcharges”. These charges may apply if you purchase (say) more
than 100,000 shares. Again, a case of top-up charges which investors
should be aware of.The frequency of trading mandated by the broker
(like minimum x trades per month): For the advertised lowest possible
brokerage rates applicability, penny stock brokers may impose minimum
trades per month, failing which higher charges may apply.
The cost of maintaining a brokerage account: A penny stock
trading account requires an annual maintenance fee to be paid.
Additionally, there may be charges for depository accounts, money
transfers, etc., which may eat into your potential profits.
Minimum deposit? Inactivity fee?: Just opening an account and waiting
long term for the right opportunity to buy the right low-cost penny stock
may come at a significant cost. There may be a minimum deposit
needed (and to be maintained at all times). The broker may charge
you for no trading and for your brokerage account inactive over a long
period of time.Charges towards withdrawal: The broker may levy charges
for each withdrawal you make to transfer money from your trading account.
The above-mentioned details provide a few important points about what a
penny stock trader should be aware of while selecting a broker. It's best to
request a written/printed schedule of charges (and any additional conditions,
top-up charges applicable) so that you are aware of all details up front.
A word of caution—most penny stock brokers heavily promote
online account opening, offering big discounts or cash-back offers.
However, online account opening will mean ignoring the conditions
in fine prints and additional charges. It is advisable to thoroughly
read and understand each detail, call up the helpline and ask for a
written schedule of charges to keep your investments safe.
Let’s continue with other points beyond transactional charges:
Is short selling allowed? Although short selling may be bound by
regulatory requirements, a few brokers may disallow short selling
in penny stocks, as a risk management measure at their own.
Those allowing short selling may need higher margin amounts to
be maintained for the short positions. Due to the highly volatile price
patterns of penny stocks along with high margin requirements, traders
short selling penny stocks should be prepared to provide additional
margin money at short notice.
The response time of the website and hold time on the phone: the high
volatility in prices of penny stocks within a short period has an effect on
both the buying and selling legs. A trader may not be able to get in or
out of a position if the broker’s site or the hold time on the phone takes
too long, leading to prices changing significantly away from the desired
levels.
Offered functionality and tools: Do you need a broad range
of customer services? Special access to dedicated research
tools and reports on penny stocks? Streaming data feeds and
technical indicators on top of them? Any such features, although
listed on promotional ads or websites, may not be free and may
come at high (recurring monthly) costs. Be aware of the costs of
special features and choose only features that you need.
Further considerations for foreign investors:
Forex risk comes into play
Forex markup fees increase the cost of trading
Trading with foreign brokers increases the risk, as in the case
of disputes the investors may have to approach the foreign
authorities for a resolution, which may not be smooth and may
turn out costly.
Penny stock scams (and how to avoid the pitfalls):
Anything that appears to offer high returns with low costs has
as fraud potential. Certain typical red flags each investor should
be aware of:
Heavy unofficial promotions through internet/emails
Promotions through brokers' boiler room telemarketing calls instead of
open and fair marketingClaims about insider information leading to a
penny stock being the multi-baggerVaguely labeled newsletter and
online forums filled with lots of “recommendations.”
Common traps that penny stock investors should be aware of are:
Pump and Dump schemes: Promoters claiming access to “insider
information” to inflate the prices, but in reality may be attempting to
offload the earlier purchased low-cost lot at high profits. The investors
who act on these tips may end up sitting with high-cost investments.
Short and Distort: Another variant of pump and dump, working in the
reverse direction. Promoters short sell the penny stock at a high price
and then promote negative news about the stock to lower the price and s
quare off their positions for a big profit.
Long-term averaging techniques: A cyclic scheme, where investors are
advised to keep on accumulating a penny stock with each price dip, with
assurances of windfall profits once the stock prices take a positive turn.
Recommendations from brokers play a fundamental role in such schemes.
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