But such stocks could just as easily precipitate to zero. not surprisingly, penny stocks are generally considered to be highly notional because of big bid-ask spreads, humble market capitalization, and lack of liquidity. This article details guidelines to help investors navigate the much barbed penny banal minefield.
Key Takeaways
- Penny stocks are those shares that trade below $5 per share, and as low as a few pennies per share.
- Many penny stocks are traded via over-the-counter (OTC) platforms such as the OTCBB or Pink Sheets, as they do not meet the listing requirements of major stock exchanges.
- While more volatile and risky than exchange-listed stocks, penny stocks can sometimes provide good opportunities. Because they are more loosely regulated, however, beware of scams and price manipulation schemes.
Penny Stock Platforms
To trade on major stock exchanges like the New York Stock Exchange and the Nasdaq, penny stocks must satisfy a multitude of special list requirements. For example, according to Nasdaq Rule 5550 ( a ), equities must maintain a minimum command price of $ 1 per plowshare. consequently, literal penny stocks that cost under $ 1 per share are chiefly traded on the over-the-counter bulletin board ( OTCBB ) and through the Pink Sheets, which is merely a quotation publisher. And due to the fact that Pink Sheets stocks are not registered with the SEC, they ’ re inherently riskier investments .
Selecting a broker
When shopping for a penny stockbroker to execute trades, their tip structures demand exhaustive consideration. Brokers who charge commissions on a per-share basis are not the best choice for penny stock investors who purchase large amounts of shares. Contrarily, brokers who charge categoric fees make greater fiscal sense. Consider the follow number of baffle penny stockbrokers in the United States :
- ChoiceTrade: ChoiceTrade trades penny stocks on the Over the Counter Bulletin Board (OTCBB) and Pink Sheet markets, and offers two distinct plans. Stock Plan-A customers receive commission-free stock trades, while Stock Plan-B customers pay $5 stock trades. For all other trades, ChoiceTrade charges a $7 flat fee. An additional $0.0007 per share charge applies to shares over 10,000.
- Charles Schwab Corp: Schwab offers penny stocks trading through its standard stock trading accounts, where 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 $4.95 per trade.
- Scottrade: Scottrade offers penny stocks trading at a flat base rate of $6.95 per trade, plus 0.5% of the trading principal on stocks under $1 per share. Scottrade offers research and screening tools, including real-time quotes, advanced stock screeners, market news, and analyst reports.
- TD Ameritrade: (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 TD Ameritrade. The standard brokerage charges of $6.95 per trade apply to penny stocks.
Charges and More Charges
Transactional costs are more crucial with penny stocks than with higher-priced equities. Let ’ s assume you intend to buy a penny malcolm stock presently trading at the current market price ( CMP ) of $ 0.10 per share, and you expect the price to double to $ 0.20 for a immediate and tidy profit. If a broke ’ s commission structure efficaciously charges you $ 0.05 on each buy and sell leg of your trade, the profits are efficaciously erased. For this reason, it ’ south vitally authoritative to consider fees, before signing on with a given agent.
Most penny stockbrokers heavily promote on-line trade by offering adult discounts or cash-back offers. But it ’ mho vitally significant to read the fine print and learn the follow points :
- Is short selling allowed? Although short selling may be bound by regulatory requirements, some brokers disallow short selling in penny stocks, as an additional self-imposed risk management measure. Those allowing short selling may need to maintain higher margins.
- Is there a delayed website response time and a long telephone hold time? Due to the high volatility associated with buying and selling penny stocks, traders may experience jarring price changes in the mere minutes they’re waiting to execute trades.
- Does the platform offer built-in tools? Traders who require access to dedicated research tools, streaming data feeds, and technical indicators needed to make trading decisions should be aware of the potential extra costs of these special features.
Avoiding Penny Stock Scams
Investors who are promised high returns for low costs should be on the lookout for the be red flags, in ordain to avoid deceitful deals :
- Unofficial internet/email promotions
- Promotions brokers offer through boiler room telemarketing calls
- Vaguely-labeled newsletter and online forums touting so-called “hot tips.”
Penny stock investors should be mindful of the pursue potential traps :
- Pump and Dump schemes: This is when promoters claim access to insider information in their efforts to inflate the prices of earlier purchased low-cost lots, that they subsequently attempt to offload for high profits. Gullible investors who act on these tips may end up saddled with high-cost investments that they’ll have trouble unloading.
- Short and Distort: This is a variant of pump and dump, essentially working in the reverse direction. Promoters short sell penny stocks at high prices and then promote negative news about the stocks in a strategic effort to lower the prices and square off their positions for high profits.
- Long-term averaging techniques: A cyclical scheme where investors are advised to continue accumulating a penny stock with each price dip, with assurances of windfall profits once the stock prices take a positive turn.
The Bottom Line
Penny stock endow can be precarious and international relations and security network ’ metric ton for everyone. But those who are uncoerced to stomach the risk should first find a broke, fund an bill, and pay argus-eyed attention to pricing moves. careful investors who steer clear of deceitful deals may see significant profits in the future .
