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How to Buy Penny Stocks Now

Updated on April 8, 2013

Getting Started Trading Penny Stocks

Hearing someone talk about “penny stocks” might be a bit confusing to the uninitiated. Does that mean some stocks are worth just a penny? The answer to that question is both yes and no.

The term penny stock generally refers to stocks that are valued at $5 per share or less. There are indeed stocks that are traded for a penny a share or even less, so many penny stocks are truly worth just one cent! However, the fact that they are so inexpensive does not mean traders cannot earn impressive returns by investing in them.

Explaining how to buy penny stocks is actually quite easy. Trading penny stocks is pretty much the same as trading any other kind of stock where the basics are concerned. They can be traded through an online brokerage firm which will allow you to execute your own trades or you could trade through a more traditional brokerage firm and work through a broker who will execute your trades for you according to your instructions.

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Trade Pennystocks Online

For people who are not comfortable with technology, trading through a traditional broker may be more appealing but in the world of penny stocks things can often happen very quickly and trying to buy or sell your shares in a hurry will depend upon your ability to get in touch with your broker. If he or she happens to be away from their desk or out to lunch, it could mean a delay that costs you money!

Online trading has gained momentum in the internet age and has allowed traders and investors to take more direct control over their transactions.

There are a number of both online and traditional brokerage houses that will execute penny stock trades for you. Some of them are very recognizable names while others are relative newcomers to the industry.

Every brokerage house will charge you a fee to execute your trades. The fee will often include a fixed amount per trade and may also include an additional fee based on the dollar value of the trade. The fee will be deducted from your account automatically when you execute a transaction.

Although you can trade penny stocks the way you are most comfortable, it may be advantageous to use an online broker because of the immediate control it gives you over your portfolio. Penny stocks can be quite volatile and may increase in price very rapidly and fall just as quickly. You could also opt for a more “hands off” approach by using special orders that will execute without your intervention.

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How to set a Stop Loss Order and Manage Risks

All brokerage houses will give you the ability to set a “stop loss.” This is an order that will be entered into their system and trigger automatically if the stock reaches a certain price. As the name suggests, this feature is intended to limit your losses and the order that get executed will sell your shares regardless of the price or how quickly it drops.

For example, you could purchase a stock for 25 cents per share and place a stop loss order at 20 cents. If the stock drops to 20 cents, an order will be placed automatically to sell your shares. With a stop loss in place you will not have to monitor the price of the stock constantly.

Similarly, a “stop limit” order will also place an order to sell your shares automatically if the price dips to a certain level. The difference is that a stop limit order will only execute if the shares can be sold at a fixed price that you determine when you place the order.

For example, let’s say you buy a stock that is trading for $1.50 per share. After buying your shares you could place a stop limit order for $1.30 which would be triggered if the stock price falls to that level, but it will only sell your shares if it can sell them for at least $1.30 per share. If the price happens to drop very quickly, it is possible that it could pass right by your stop limit order without even giving your order a chance to be executed.

Traders will need to weigh the benefits of a stop loss against those of a stop limit order depending on how much risk they are comfortable with.

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Going Short on Penny stocks

People who are true newcomers to the world of trading have probably heard the terms “long” or “short” a time or two and wondered what it meant. To go long means you are betting on a stock rising in price. Going long is another way to say you are going to buy.

Going short is the opposite and might be a little hard to get your head around. When you go short you are betting that the stock is going to decrease in value. When you execute a short sale, the brokerage borrows the shares that you sell. The difference between the price you sold the shares for and the amount you pay to buy them back (so they can be returned to the brokerage house) is what constitutes your profit and hopefully not your loss!

Where Can I Buy Penny Stocks Online?

Penny stocks are traded on the over-the-counter or OTC market. This is a market that was established for smaller or lesser-known companies who have gone public with the issuance of stock. These stocks are also referred to as “unlisted.” The OTC market is also called the OTCBB market which stands for “Over The Counter Bulletin Board.”

Despite its status as a lesser-known market, the OTC market has requirements in place that companies must meet before their stock is permitted to trade there. The same is not true for stocks that are traded on the “Pink Sheets.” Stocks that trade there may be unable to meet the requirements needed to trade on the OTC or may simply wish to avoid disclosing the financial details that listing on the OTC board requires.

Risk of Trading Penny stocks

Many penny stock traders are day traders, meaning that they are usually in and out of their transactions quickly – usually no longer than a day. Penny stocks are attractive to many potential traders because they are so inexpensive. A trader can buy thousands of shares of stock for a relatively small investment and since penny stocks are so volatile, traders have the opportunity to make substantial gains if they know what they are doing.

Like any trading or investing, it’s recommended that you research the subject thoroughly and spend some time “paper trading” before you actually invest in the market. People who master the art of day trading can make impressive amounts of money. On the other side of the coin, it is also possible to lose money as well.

It’s always advisable to get advice from a professional before making any kind of investment and penny stocks are no exception. A good professional investment advisor should be able to tell you all that you need to know about investing in penny stocks before you make your first trade.

Do you Understand How to Buy Penny Stocks Online Now?

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