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TFN Free Research Report: How to trade penny stocks

Today's Financial News - Posted August 14, 2009

How to trade penny shares? The TFN team has compiled a list of brokers that allow you to trade penny stocks at reasonable rates..

by Tara Useller

Baltimore, MD — TFN: So, you want to trade Penny Stocks?

Once upon a time a ‘Penny Stock’ was any stock whose shares traded at less than $1 each — whose value was literally, pennies. Recently, the Securities and Exchange Commission (SEC) altered their definition, and now defines any stock whose shares trade for less than $5 per share as Penny Stocks.

(Sometimes I think even the SEC’s way to conservative: I’ve seen penny stock newsletters who tout shares trading for over $10 as pennystocks. Go figure!)

While $5 is a lot more than 50 cents … or 5 cents… or 0.005 cents, these stocks are still regarded by many analysts as carrying the same level of risk and should be handled with the same caution and care as true penny stocks were twenty years ago.

True Penny Stocks

But there’s a whole other world of Penny Stocks. They’re traded on the OTCBB (”the Bulletinboards”), as OTC (over-the-counter) stocks and as Pink Sheets. OTCBB stocks are smaller companies that have not met NASDAQ requirements, but do meet a modicum of reporting requirements to be Over-the-Counter, but still trade electronically on the Bulletin Board. Straight OTC and Pink Sheet Stocks are sold individually in a convoluted form that generally involves a brokerage taking all their Over-the-Counter orders in each day from all their clients and manually placing their orders.

Because of the tedious second level of care required for OTC and Pink Sheet stocks, many brokers simply won’t deal with them or will only deal with OTCBB trades. Even when you find a broker that will facilitate trades for these small stocks, you will often also find surcharges and additional fees for shares below a given dollar value (generally $1 or $2) or for transactions over a certain volume, sometimes as low as 1,000 shares.

Other brokerages, like ING’s ShareBuilder, don’t allow you to trade stocks priced at less than $1 at all. (Not even if they were former bluechips…)

So as you prepare for the adventure that is Penny Stock Investing, you may find that your own broker does not provide this investment service. Some active Penny Stocks traders may find that their overall trade volume is high enough that they can move all their trading to a multi-service broker and find great rates. Other traders may find that they need not only a separately funded trading account, but a separate brokerage to get the best rates on their Penny Stock trades.

To help you evaluate your Penny Stock trading options, the team at TodaysFinancialNews.com has prepared a short list of online brokerage services that trade both common exchange stocks, Over-the-Counter, and Pink Sheets.

This is not intended to be an all-inclusive list, nor do we offer any recommendation on the efficiency or accuracy of one brokerage firm over others. We’ve sorted them based on fees in ascending order.

This should give you a good idea of where to find the best rates are based on your own trading patterns. As you evaluate your options for successful and cost effective trading, please keep in mind that firms may assess additional activity and account fees, including fees if the value of your investments drops below their required minimum balance.

As a general rule, please consider:

Penny stocks frequently have extremely low trading volumes. A mention in the press, a rumor, a recommendation can push up volume and price within minutes, pushing up share prices. This is part of the allure of pennyshares. You might find it difficult to get in at recommended entry levels when this occurs. And sometimes it will be difficult to sell your position… simply because there may not be enough buyers.

Don’t chase stocks. And only speculate with money you can afford to lose.

Pennystocks are not the place for amateurs!

Broker	Min opening	Fees per trade	Notes	OTC:BB	OTC/Pinks
www.optionshouse.com	$1,000	$2.95	Additional charge of $0.01 per share if stock price is <$2, may trade up to 50,000 shares per order, additional shares will be billed as an additional trade; BB and pink sheets must be traded with a broker, although there’s no additional fee for this	Yes	Yes
www.zecco.com	none	$4.50	No limitations on volume, some may need to be traded by a broker	Yes	Yes
www.tradeking.com	none	$4.95	Additional charge of $0.01 per share if stock price is <$1 and an additional $0.015 per share if over 1,000 shares in order; $100 minimum order for OTC and Pinks	Yes	Yes
www.lowtrades.com	none	$4.95	Additional fee of 1% principal on all orders of more than 100,000 shares	Yes	Yes
www.choicetrade.com	none	$5.00	No fees or limitations on volume or price; monthly fee for data access	Yes	Yes
www.firstrade.com	none	$6.95	Flat rate up to 5,000 shares for stocks valued at over $2, additional fee of 1/2% per share for stocks priced under $2 and additional fee of 1/2% per share for orders over 5,000 shares	Yes	Yes
www.etrade.com	$1,000	$6.99 – $12.99	surcharges for lower priced stocks and high volume trades were not specifically noted, trade commissions based on volume and/or minimum account balance	Yes	Yes
www.tradefreedom.com	$1,000	$6.99 – $9.95	Rates based on volume, add’l broker fees do not apply to OTC BB and Pink Sheets	Yes	Yes
www.scottrade.com	$500	$7	Additional charge of 1/2% principal when <$1 per share; some pink sheets must be traded with a broker – for the $27 fee	Yes	Yes
www.trademonster.com	$2,000	$7.50	Additional charge of $0.01 per share in excess of 5,000 shares, additional fee if <$2/share	Yes	Yes
www.nobletrading.com	$500	7.95	Additional fee of .003 x the principal $.50 min and $22 max for OTC BB shares; add’l fee for real-time trading platform	Yes	Yes
www.mytradz.com	$200	$7.95 – $17.95	$7.95 for common trades, additional $10 on base for OTC BB and Pink Sheets, add’l fees for upgraded software and research services	Yes	Yes
www.tdameritrade.com	$2,000	$9.95	No fees or limitations on volume or price noted	Yes	Yes
www.tradestation.com	$5,000	$9.99	Flat rate or per share for common stock, flat rate of $9.99 per trade for OTC BB and Pink Sheets, up to 100,000 shares	Yes	Yes

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