How to Choose a Great Penny Stock Broker - dummies

How to Choose a Great Penny Stock Broker

By Peter Leeds

If you want to do well in penny stocks, start with a great penny stock broker. Before the Internet dramatically changed the investment landscape, almost all stockbrokers were considered full-service brokers. An investor called the broker on the phone whenever she wanted to make a trade, and the broker charged a hefty commission — sometimes hundreds of dollars! — for his efforts. Fortunately, the Internet has changed all that.

Today, almost all brokers are considered discount brokers. Their commissions are very low — anywhere from $5 to $19.95 per trade, generally — and they have online tools and account platforms for researching and trading stocks. When you want to trade stock though a discount broker, you generally enter your buy or sell details through the Internet instead of placing them over the phone.

If you do call to make a trade over the phone, the broker will charge you a much higher commission, often as much as double the regular fee. With discount brokers, you don’t get the personal service of a full-service broker, of course, but that’s not a top priority for most penny stock investors — especially not for $200 per trade.

The characteristics you want in a stockbroker depend on your personal goals and strategies. For example, if you only plan to invest a few hundred dollars, you probably want a broker with no minimum balance requirements to open an account (meaning that you don’t have to have a certain amount of money in your account to get started).

If you plan to be a very active trader, making 20 buys and sells per week, low per-trade commissions may be more important to you. If you have lot of penny stocks in your account, you want a broker who doesn’t add fees or apply penalties for low-priced shares.

Some of the criteria that you may look for in a broker may include, but aren’t necessarily limited to, these:

  • Minimum amount to open an account

  • Penalties for low account balances

  • Commission fees per trade

  • Special commission rates for lower-priced shares

  • Ability to trade (or not trade) on certain markets

  • Ease of use for online account, and trading interface

  • Customer service (both phone and e-mail)

  • Research and analysis tools

  • Speed of trade executions

  • Size of the client base

By deciding which criteria are most important for you, and then doing a little research on potential brokers, you can choose a discount broker who best meets your needs.

Penny-stock-friendly brokers

The criteria you use for choosing a broker depends on the type of trades you plan to do. An ideal broker for larger, blue-chip shares may not be so ideal for trading penny stocks.

For trading penny stocks, find a firm that doesn’t have minimum balance requirements to open an account and that charges low commissions.

Ask potential brokers for their commission schedule. This information is available online or by e-mail and indicates how much the broker charges per trade. The commission schedule should also spell out any restrictions or extra fees for trading low-priced shares, and may even explain if any specific markets or sizes of stocks are restricted or come with additional fees.

If you’re relatively new to investing, find a broker who provides clients with helpful, easy-to-use online tools, such as price alerts and interactive charts. Of course, if you’re planning to do most of your research through sources other than your discount broker, what tools they offer is a less significant factor.

Just about every discount broker has research and analysis tools you can use after you have set up an account. However, to use their more advanced tools you may be required to pay additional fees. Although these cost-based services can be very good, the free options can leave much to be desired.

Due to this situation, the majority of penny stock traders rely on free online tools to do their research rather than those provided by their discount brokers. For example, you can use high-quality charting websites, get price quotes, set up price alerts, and review financial information all at no cost, and from reliable sources.

When to upgrade your penny stock broker

Don’t be afraid to change brokers if your current one isn’t meeting your needs. A lot of fish are swimming around in the broker sea, and most of them want your business.

Yes, changing brokers can be a hassle, and your original broker may not make the transition easy for you. However, going to the effort of changing brokers is worth the trouble if your current broker isn’t meeting your trading needs.

You don’t have to do all your trades with a single broker. Many investors have multiple brokerage accounts. You may choose to have one account just for the tools it offers, another account for making penny stock trades, and yet another for trading larger equities.