Don't Get Tied Up in Knots With Penny Stock Accounts
Getting a trading account for penny stocks is no different than getting any other brokerage account. The Resources section lists three possible brokerage choices. What is important is to avoid the "boiler room" hard-sell brokers that charge large mark-ups for companies that they might have a substantial interest in. These are also called "pump and dump" brokers who sell the promise of profits by a company with little infrastructure and poor management.
Instructions
1. Trade penny stocks with extreme care and diligence. Penny stock companies usually have poor financials, an imperfect sales plan and part-time management. Brokers might represent one or more of these companies and lack the expertise to become market makers in penny stocks.
2. Buy and sell penny stocks through companies that also participate as members or affiliates of major exchanges. Do not use penny stock brokers who only trade penny stocks. Call the National Association of Security Dealers in Washington, D.C., to see whether complaints, federal charges or investigations are on record against a particular company.
3. Ask the broker whether he is a market maker in the penny stock. Market makers buy and sell shares from their own account or receive a brokerage fee for matching buyer and seller. Penny stocks cannot be pledged or hypothecated under security rules because they trade under $5 per share.
4. Analyze whether the trader is selling you a "story stock" or promise of possible future earnings. Compare the promise to the company fundamentals. Learn how long the company has been public and who their banker and investment banker is. Few penny stocks ever make the investor money. Stocks go up in value when they have earnings and an infrastructure--not just an idea.
5. Know the spread or difference in price between the bid and asked. For example, a stock might be offered at 20 cents bid, 30 cents offered. This means the broker is charging 50 percent for the right to buy and sell your stock. Those mark-ups make it difficult to ever make money.
6. Trade penny stocks that are listed on the "pink sheets" or the "otcbb" or over-the-counter bulletin board. You can find brokers who deal in specific stocks this way or use any of the large online brokerage firms that participate in penny stocks such as Optionxpress or E*trade or Scottrade to search for the best buy and sell. Trades are done as agents, not market makers for a small fee.
