Penny Stock Brokers Review

What Are Penny Stocks?

Penny stocks, also known as micro-cap stocks, are investments that cost under $5 and which are not sold on the major exchanges but instead are listed on Pink Sheets, a quotation publisher, and the Over-the-Counter Bulletin Board, or OTCBB. Penny stocks are a risky investment, but if done correctly, they can offer a high return reward.

Penny stocks are not as regulated as traditional stocks and they are not very liquid, meaning they are not easy to sell once you purchase them. As such, penny stocks are easily targeted by illegal fraud schemes, such as pump and dump operations, so named because fraudsters temporarily hype the stock (pump) based on false information and then once the stock has reached a higher share price, sell their positions (dump) at the higher price, leaving victims with a considerable loss once the stock falls to a much lower value. Stock promoter schemes are another common and illegal practice in which individuals or companies are paid to promote the lure and value of certain stocks so as to be more enticing to potential investors. Their information is not based on any research or data but just plain hype.

There are many misconceptions about trading penny stocks. One common misconception is that major companies, such as Microsoft and Home Depot, once sold penny stocks that eventually grew in value and thus rewarded its original shareholders well. However, the reality is that the majority of penny stocks don't go beyond the $5 threshold. Another misconception is that once some of the most successful companies on the exchanges, such as Wal-Mart for example, reached a point where their stock split, sometimes dropping under $5, they reverted to a penny stock. However, just because a large, publicly traded company's share price may split and dip below $5 doesn't mean they're suddenly a penny stock. True penny stocks are listed on the OTCBB and Pink Sheets.

A third misconception is that penny stocks, because of their low cost, increase rapidly, thus giving investors a quick return, and since they are so cheap, one can buy several thousand shares for little upfront investment and quickly get a 50 to 100 percent or more return. Unfortunately, it is more likely that penny stocks will drop a few cents in value, causing a significant loss.

Penny Stockbrokers: What to Look For

With all the risks associated with penny stocks, it is a buyer-beware market. You are safer to employ the help of a trusted broker rather than doing it yourself. A trusted broker is trained to spot fraudulent penny stocks and can know where to purchase legitimate, quality investments to help round out your financial portfolio. Additionally, penny stock traders worth their salt offer resources to help you learn more about these and other investment opportunities if you do decide to go it alone.

Here are a few items to consider as you research and choose the best penny stockbroker. For more in-depth information, consider reading our reviews of the best online stock trading brokers. We also have some helpful articles on penny stock brokers.

Platform & Research Tools
Penny stockbrokers will provide you with an online trading platform that includes basic tools, such as real-time quotes and stock exchange trackers, so you can receive up-to-the minute information on how specific stocks and the overall market is performing. Services, such as optionsXpress, have mobile apps that offer the same tools you'll find on the brokerage's website but take significantly less time to load, giving you fast, up-to-the-minute information on your stocks and the market.

In addition, a good brokerage firm will include important profit and loss estimations as well as volatility reports so you can thoroughly research a specific company first before investing. Most platforms have user dashboards that include important financial news bites, though only a handful allow you to customize the dashboard to include only the information you find most relevant. The more reports and research tools a broker offers, the more legitimate information you have at your fingertips to make well-informed investment decisions.

Fees & Commissions
Fees are generally the biggest factor investors consider when choosing a penny stockbroker. As with traditional online stock-trading brokerages, penny stocks generally require you pay a set, per-transaction fee in addition to a percentage commission to your broker. However, because of the low cost of penny stocks, these fees and commissions are generally lower in comparison to other investments. Some brokerage firms have tiered pricing, meaning the more penny stock trades you place at one time, the less you pay in overall commission and trade fees.

In order to begin trading, you will first need to open an investment fund. Brokerages vary in the minimum amount required to open an account, but it's generally around $200. Most broker firms require a minimum of $2,500 in order to start trading, with an even higher threshold in place if you want to avoid being dinged with annual account fees. All of the brokers listed on our site, including Interactive Brokers, list the fees and requirements in a prominent place on its website. This makes it easier for you to determine if you are comfortable with the price structure and the required minimums of your chosen broker.

Education & Resources
The educational materials available through penny stockbrokers can be thorough, with information for both beginners and more-experienced investors alike. Most offer information in a variety of mediums, ranging from FAQs to informational documents to video tutorials and webinars. This means you can learn in the manner that suits you best. Brokers should also be easy to reach via telephone, though the best penny stock traders are available 24/7. One brokerage that provides 24/7 telephone service is E*TRADE.

Penny stocks are risky, but if researched thoroughly and executed correctly, they have the potential for financial reward. A trusted brokerage that specializes in penny stocks is best equipped to help you identify safe and viable investments to help round to your portfolio, achieve financial security and increase your overall worth.