Penny stocks may cost more than a penny but usually are less than shares in large companies whose stocks can sell for hundreds or even thousands of dollars. Penny stocks are those sold for under $5 dollars and can range from a small percentage of a penny up to about $4.98. Smaller companies looking for expansion capital usually sell shares. Penny stock trading accounts are relatively easy to set up online and often don't require as much investment as traditional accounts to begin playing the stock market.
1. Choose an online brokerage house that specializes in penny stocks. Most online brokers offer you a range of stocks, which often include low-priced stocks. Companies such as eTrade, Trading Direct and Lowtrades offer easy online access for trading. The terms vary with each brokerage.
2. Fill out the paperwork required to open your account. Internal Revenue Service forms must be completed, in addition to various other financial and personal details. Most forms can be completed online, while some online traders require a hard copy signature on file to open your account for trades.
3. Make a deposit into the account to get started. The account is basically a bank account from which you draw money to purchase shares and deposit funds when you sell. Some require large initial deposits up to $1,000, while others may not have any minimum balances, but instead charge an annual fee for using the service. Final account arrangements can take up to three days so don’t expect to trade the same day you make the deposit.
4. Expect to pay between $5 and $10 or more for each trade, whether you are buying or selling. Fees vary at different companies as well and depend on how much money you keep in your account and how many trades you make each month. Fees are taken out of the account you set up with the brokerage. Some companies require you to keep a minimum balance to keep the account open while others charge higher fees if your balance falls below a certain amount.
- Limit your penny stock purchases to companies that file on major stock exchanges such as the American Stock Exchange (AMEX) or the NASDAQ Small Market Cap. The stock exchanges require financial disclosure documents from the companies they list. You can access these filings to research the health and history of a company in which you invest.
- Over-the-counter (OTC) penny stocks are those traded over the phone or directly from the small companies selling shares. The OTC stocks are not regulated by any stock exchange and may be difficult to sell when you're ready to. Brokers who verify their legitimacy typically back OTC stocks.