How Do I Get Started in Penny Stocks?

by Linda Ray

Just like as with any new venture you're getting ready to undertake, you must do a little research to find the best avenue for getting started trading penny stocks. The term "penny stocks" refers to the cost of buying a share in a certain company. Penny stocks sell anywhere from a percentage of 1 cent up to $4.98. Small companies looking to expand usually sell penny stocks.

Think about how you will be trading. If you want to spend time watching the stock market and selling and buying stocks several times a week, you'll want to look for a broker that rewards you for heavy trading by giving you free trades or reduced fees. If, for example, you're thinking of investing and spending very little time making trades, you'll need a brokerage that doesn't charge maintenance fees for little-used accounts.

Choose an online brokerage that specializes in penny stocks. Look for a brokerage that offers trades on the American Stock Exchange, also called AMEX, or the NASDAQ Small Market Cap. OTC — or over-the-counter — penny stocks are sold directly by companies and may be difficult to sell. The sale of OTC penny stocks is not regulated by a stock exchange.

Apply for an account with a brokerage by filling out the forms provided on its website. Most forms, including those that meet Internal Revenue Service requirements, are available online. Electronic signatures are becoming more popular, though you still may need to send a hard copy signature to some companies to keep on file.

Send the company a deposit to open your trading account. Various companies require different minimum deposits. For example at eTrade, you need $1,000 to open an account, while Trading Direct has no minimum balance requirements. You may earn perks if you keep minimum balances at many companies, however, such as a number of free trades each month or access to in-depth research.

Follow the online trading instructions at your brokerage and buy a number of shares in the company of your choosing. Find as much information about the small company that you can before investing to reduce your risk. Companies trading through the established stock exchanges post financial information for investors to peruse.

Tip

  • Subscribe to online newsletters from reputable broker advisers. Many successful brokers branch out and sell their opinions through books, magazines and subscription newsletters. Other advisers offer free advice in hopes that you'll use their services.

Warning

  • Be wary of chat rooms and online investing communities, where you might encounter doomsday predictions or unethical and illegal advice. Advice you read online — including in this article — is supposed offered for informational purposes only and should not be construed as guidance to buy or sell different penny stocks or use any specific brokerage that has not been vetted by you personally.

About the Author

Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."

Photo Credits

  • Medioimages/Photodisc/Photodisc/Getty Images