There are essentially three different options when choosing where to buy penny stocks: A discount brokerage firm, a full service brokerage firm, and a money manager or investment advisor.
Discount Brokerage
A lot of people just go with a discount brokerage firm because it’s cheaper. I believe this is fine for seasoned investors but not if your new to stock trading, especially penny stock trading, due to its highly volatile nature. There are many good discount brokerage firms and pretty much all of them are accessible online. A discount brokerage account will allow you to buy and sell stocks online at the click of a button. They normally will charge you a set commission per transaction though many will lower the commission if you are a high volume trader. Some good discount brokerage companies include Interactive Brokers , TD Ameritrade, E*Trade, and Charles Schwab. Just make sure you compare the services offered and their fee schedules as depending on the type and quantity of trades you perform, one firm may be more cost effective than another.
Full Service Brokerage
Despite the growing popularity of discount brokerages, there are still a good number of investors who prefer full service brokerages when deciding where to buy penny stocks. Full service brokerages though typically more expensive, offer a much greater level of service for investors including general investment advice, executing trades on your behalf, and even recommendations on which stocks to buy and when to sell them. For investors with limited knowledge, particularly those who wish to buy penny stocks, a full service brokerage could be a good choice. Just be sure you go with a reputable company you find a stock broker you can trust and that has experience buying penny stocks. Some of the better full service brokerage houses include JPMorgan, AG Edwards, Merrill Lynch, Morgan Stanley, and UBS Financial Services.
Money Manager / Investment Advisor
Finally, for those who not want to even think about which trades to perform and when, you can find a Money Manager also known as an Investment Advisor. Though most people think of money managers as those who manage mutual funds, money managers can actually manage any type of investment. A money manager is someone who will manage your account, make trades based on their expertise, and keep you up-to-date on the progress of your account. Though some money manager are tied to brokerage houses there are still many who are completely independent. Now since our focus is with penny stocks, you will want to find one who has a proven track record trading them. Finally if you choose to have a money manager, it’s very important to find one you can trust and that has a strong reputation in the financial industry.
One of the first questions you may have is how to buy penny stocks. Before we get there though, you should first understand a little about what penny stocks are.
Penny stocks, also known as nano stocks, dollar stocks, and micro cap stocks are by definition any stock trading below $5 per share. As such, penny stocks do not typically trade on major stock markets like the National Association of Securities Dealers (NASDAQ) or the New York Stock Exchange (NYSE), unless of course the stock temporarily dips below $5. Instead, you will find penny stocks listed on the over-the-counter (OTC) and the Pink Sheets markets. Unlike the OTC however, the companies listed on the Pink Sheets market do not need to file current financial reports with the Securities and Exchange Commission (SEC).
So, how to buy penny stocks? Well, similarly to buying other types of stocks, your main two options for buying penny stocks are via a full service brokerage or using a Discount Brokerage account.
Full Service Brokerage
Using a full service brokerage will mean dealing with a real live stock broker. You give your broker (usually done over the phone) the number of shares you wish to buy, the maximum price you wish to pay, and the ticker symbol of the stock. The stock broker would then attempt to purchase these stocks on your behalf. The stock broker gets payed either through a commission per transaction or more commonly through principle transactions, meaning they would make money on the difference between the bid price and ask price, known as the spread. The main advantage to using a full service brokerage account is that your stock broker can typically give you investing advice as well as facilitating the trades for you. The main disadvantage however, is these services are typically expensive. If you decide on a stock broker, be sure to find one that is reputable and trustworthy with a solid track record.
Discount Brokerage
Alternatively, you may create an account with a Discount Brokerage firm (i.e. online penny stock broker). Once you’ve created an account, you can make trades online and with relatively little effort. The main advantage with a discount brokerage account is that it’s much cheaper than using a full service brokerage but you need to know what your doing so it’s not advised for novice investors. Also, for very thinly traded penny stocks, you may simply not be able to execute your desired trades for the price you want without the use of a stock broker who has more resources at hand.
Knowing how to buy penny stocks is one thing but knowing the best penny stocks to buy and when to sell them is another. Remember, trading penny stocks has a very high risk attached to it. Yes the rewards can also be great, but you need to know what you’re doing so whatever you do, don’t just go off and start buying random penny stocks hoping they’ll appreciate in value. Get educated first.
