All About Penny StocksUnderstanding Penny Stocks by Peter Leeds

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Getting a Good Stock Broker

See the bottom of this page for some top broker choices!

Getting a trading account set up is as simple as opening a bank account. For most online discount brokers, you can do the whole process over the Internet.

There are Two Types of Brokers

penny stocksDiscount

I strongly recommend using a discount broker, especially for penny stocks. Usually you can open an online trading account, which is certainly the best way to go to monitor and view all your trades, history of transactions, and to get quotes and information on the penny stocks that interest you.

They are also less expensive, often allowing trades for as little as $5.

peter leedsFull Service

These deal one on one with the client, and are usually better suited for traders with very large portfolios. The commissions are high, usually several hundred dollars for the same trade you could have made for $15 through a discount broker.

You will have access to a full service broker's advice, and they will come to you with investment ideas. They are generally afraid of penny stocks and discourage their clients from investing in such equities.

Choosing a Broker for Penny Stocks

First you need to decide on your own requirements from your broker. There are many choices out there competing for you as a client, so be choosy and make sure to get the best one for your own needs.

Perhaps you are not starting with a large amount of money, and therefore high commissions will be too expensive. Will you be involved with foreign stocks, and do the brokers you have in mind have strict policies for foreign trading? Will you be trading bonds? Canadian penny stocks? Do you have an existing broker you are happy with? Do they allow penny stock trades? Will you only be able to trade by phone?

We feel the best approach is to have one good broker, not three or four. If you currently have several brokerage accounts, consider transferring all of your assets to the one broker who works best for you overall.

Broker Criteria

Commissions

I have found that this is the most important consideration for most penny stock traders, due to the higher trade frequency, and the lower total dollar amounts, which makes brokerage fees very significant. However, I also feel that this should not be the primary consideration, assuming that the brokers you like have competitive rates.

Speed of Order Execution

I feel that this is the most overrated criterion when choosing a broker.

Despite what advertisements may lead you to believe, the speeds of most brokers are approximately the same.

While penny stocks can be volatile, they will usually sit within each price range more than long enough for you to enter and exit at the prices you decide. It will more likely be your own hesitation or the time it takes you to make your trading decisions that will affect your trading prices.

Reliability

This can be very important. Brokers do make mistakes, and their web sites go down, and even their computerized trading programs can foul up. There is nothing worse than going to make a time-sensitive trade and being unable to access the web site. When it comes to fast-moving penny stocks, this could be very costly.

Policies With Penny Stocks

This is the most important consideration for penny stock investors in my opinion. Policies include things like the minimum required balance (if any), commissions on penny stocks and foreign stocks compared to regular fees, monthly fees, and the ability (or inability) to trade shares from the penny stock markets. While one broker may not allow trades in shares under $1.00, and requires a $2,000 minimum deposit, another may not have limitations on either.

Accessibility

If a trade does go wrong, or even if you just have a quick question, you need to be able to get through to your broker without sitting on hold all day long. You also want to feel that your questions and concerns get answered, regardless of whether it is by e-mail, phone, or otherwise.

Customer Service

On a similar note, when you do get through, are their replies professional and courteous? More importantly, are they timely and correct?

Research and Tools

This should be a secondary consideration. There are so many free sources for data and information that you may not ever use the 'bell and whistle' features that your broker provides.

Brokers for Penny Stocks Ranked

The following are our original broker rankings for penny stock traders.

BROKERLTTDSCAMET
OVERALL RANK12345
COMMISSION PRICE12 435
RELIABILITY13245
CUSTOMER SATISFACTION1 2345
CONFLICT RESOLUTION31254
CUSTOMER SERVICE32 1 45
SPEED OF EXECUTION12345
TOTAL SCORE (lower is better)1014182834
  • LT LowTrades
  • TD Trading Direct
  • SC Scottrade
  • AM Ameritrade
  • ET E-Trade

Our Current Champion

Lowtrades.com

Lowtrades has made some much needed improvements to their website. They have an excellent investing overview section and offer free real time streaming quotes. Their customer service reps are also very knowledgeable and friendly. Fortunately, all of these upgrades havenít affected their incredibly low service fees.

There is no minimum opening balance for an individual cash account. Lowtrades does have a semi-annual inactivity fee of $30 but it is automatically waived if you conduct 1 trade every 6 months.

Each on-line trade, limit or market is just $5. If you conduct a trade over the phone, each transaction will cost you $25. Penny stocks are not treated any differently than any other stock.

The Best of the Rest

Trading Direct

Trading Direct is another great company that offers competitive prices. There is no minimum balance required for cash accounts and the annual maintenance fee of $60 is waived if you conduct one trade per year.

Their on-line commission fee is $9.95 per trade (market or limit) and broker-assisted commissions are $29.95. Trading Direct allows for trades in penny stocks, including OTC-BB and Pink Sheets.

Scottrade

A small brokerage firm with lower over-head and commissions, Scottrade has a beefed up website with a long list of products and services, including free real time streaming news from Dow Jones and free unlimited real time streaming quotes and charts. If conducting trades is your main priority - then Scottrade is a good choice.

With Scottrade, you need to have an opening balance of only $500, there is no yearly inactivity fee, and they do not charge account maintenance fees. On-line market trades on shares over $1.00 are only $7 and limit orders are $12. For broker assisted trades, market orders are $17 and limit orders are $22.

Scottrade will trade penny stocks, but they are conducted under different rules. All trades on stocks under $1.00 will cost you $12 plus 0.5% of the principle amount. For Pink Sheet and stocks traded in Canada you need to speak with a broker (they cannot be conducted on-line). For these, the commission fee is $22 per trade plus .5% of the principle amount.

Ameritrade

Boasting the most on-line trades in the industry Ameritrade has an informative website with a vast array of trading tools and services. While you need a minimum of $500 to open a cash account, an opening balance of $1000 will get you 25 commission free on-line trades (limited time offer - good for the first 5 weeks).

There is a non-activity fee of $15 per quarter but it is waived if your minimum balance is $2000 or if you make more than 4 trades every six months.

All on-line trades are just $10.99; if you want to conduct a trade over their automated phone the service fee is $14.99. If you need to speak to a broker to conduct your trade, a market order is $24.99 and limit orders are $29.99.

Ameritrade allows for trades in penny stocks and the on-line commissions are the same as non penny stocks: $10.99.

E-Trade

e-Tradeís minimum requirement to open a regular cash account is $1000. While there is no inactivity fee for the first year, e-Trade will start charging a quarterly fee of $25 beginning in the following year. That fee is waived though if you have conducted 2 or more trades in the previous 6 months or if you have an account balance of $5000.

All market and limit orders are $19.99, with an additional $3 service fee. That said the trade commission goes down to $9.99 on the 27th trade done in any given quarter.

If at any time you trade more than 5000 shares on the NYSE, you will be levied with a 1 cent per share charge...on top of commissions. If you decide you want to conduct a broker assisted trade, add $45 on top of everything else.

e-Trade does trade in stocks listed on the OTC-BB and Pink Sheets and the commission fees are the same as those mentioned above.