The U.S. Securities & Exchange Commission define penny stocks as companies that have a small market cap and trade under $5 per share. In this article we explore where to buy penny stocks. Given, their risky nature, the SEC warns that its possible to lose your entire investment in penny stocks.
It’s true. Penny stocks are risky. However, the potential returns can far outweigh the risks if traded correctly.
On February 3, 2017, UBI Block Chain Internet LTD. (OTC: UBIA) was trading at $0.55 per share. On March 7, 2017, shares of the stock hit a high of $34.20 per share. That is a gain of 6,121% in about a month.
Of course, returns like this or not common. However, they happen a lot more to small cap penny stocks then established large caps.
It’s a lot easier to double your market cap when its $10M compared to a company like ExxonMobil, which has a market cap of more than $350B.
Penny stocks are appealing because the barrier of entry is low. One hundred shares of Apple will cost more than $15K. For some traders with small accounts, trading high-dollar stocks makes it difficult to grow an account.
Penny stocks can be traded on an securities exchange like the Nasdaq, AMEX, ARCA, and NYSE. They are also traded over-the-counter, in the OTC Markets.
Nearly all major retail broker offers penny stocks, including ones that trade on the OTC Markets.
Where to buy penny stocks – The OTC Markets
The OTC Markets list over 10,000 securities. However, it’s important that you understand the labels and the marketplaces.
OTC QX: Companies that trade at this marketplace must meet high financial standards, demonstrate compliance with U.S. securities laws, and have a third-party sponsor introduction. There are nearly 400 securities that qualify for OTC QX and have a market cap exceeding $1 trillion.
OTC QB: Consisting of early-stage and developing U.S. and international companies that are not able to qualify for OTC QX. Companies listed on this marketplace have current reporting and undergo an annual verification.
OTC Pink: Companies that trade through this marketplace do not have to meet any minimum financial standards, it includes: shell corps, penny stocks, distressed firms, delinquent companies, and dark corporations not willing to provide the necessary information to investors.
The Pink market gives companies labels that further explain their situation.
Current Information: These companies follow the international Reporting Standard, which includes periodic disclosure filings. They also have the option of following the Alternative Reporting Standard by making filings publicly available through the OTC Disclosure & News.
Limited Information: These firms may have issues reporting, be under economic distress, or in bankruptcy, offering limited information to investors.
No Information: Indicates companies that are not able to provide information, or their available information is older than 6 months. They include firms that are defunct, have ceased operations, and even dark companies that have a shady past.
Caveat Emptor: OTC Markets says buyer beware for companies labeled in this group. They might be associated with a scam campaign, be under investigation, criminal activity, regulatory suspension or shady business practices.
Where To Buy Penny Stocks: Which Broker Should You Choose?
TD Ameritrade: They charge a flat rate commission of $6.95 on all trades, and have no share limits. This can be very appealing when compared to some other brokers charge a per share fee. Imagine trading a stock that is trading at sub-penny levels and having to pay a fee for every share you buy or sell.
Interactive Brokers: They charge $1 per 100 shares. Not really ideal for trading low priced penny stocks. As an alternative, they can charge a set percent of trade value.
A much more attractive commission schedule for someone who wants to trade low dollar penny stocks.
E-Trade: Similar to TD, they offer a standard $6.95 per trade fee.
Charles Schwab: They charge a $4.95 per trade fee.
Fidelity: Charges a flat fee per trade of $4.95.
Scotttrade: They charge a flat fee per trade of $6.95.
Given that all these brokers are fairly competitive, you’ll want to request a demo to see how you like their platform and other features before deciding where to buy penny stocks. The minimum account size at Interactive Brokers starts at $10K. That said, if you are trading a smaller account, go for a broker that accepts a smaller minimum account size. Make sure to spend some time paper trading with broker platforms before you decide which one to go with.
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